Humana Inc. (HUM) Option Bulls Look to Cash In on M&A Rally

Breaking down the run on short-term calls as Humana Inc (HUM) soars on takeover reports

May 29, 2015 at 1:55 PM
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Insurance issue Humana Inc (NYSE:HUM) skyrocketed in early afternoon trading -- and was temporarily halted -- thanks to reports the company could receive a buyout offer from one of its peers, possibly Aetna Inc (NYSE:AET) or CIGNA Corporation (NYSE:CI), soon. After topping out at an all-time high of $219.79, HUM was last seen 20.4% higher at $214.60, and it looks like at least one short-term bull is about to bank. 

HUM calls have now traded at four times the average intraday clip, and have roughly doubled put volume thus far. The security's 30-day at-the-money implied volatility edged 10.1% higher to 38.4% -- which puts it in the 100th percentile of its annual range.

Digging deeper, it looks like one prophetic trader rolled the dice just in time to capitalize on HUM's rally. At 1:10 PM ET -- when HUM was trading around $177 -- several blocks of 5/29 180-strike calls were presumably bought to open across a number of exchanges. The calls were bought for $0.25 apiece, making breakeven ahead of tonight's expiration $180.25 (strike plus premium paid). Within 10 minutes, HUM was well north of $200.

Since the takeover rumors emerged, HUM's longer-term options have drawn interest. It looks like some traders may be liquidating their now deep-in-the-money August 175 calls, while others are initiating fresh positions at the weekly 6/5 210-strike call, to gamble on an extended rally north of the strike through next Friday's close, when the options expire.

Prior to today, HUM puts were the options of choice. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 1.15 stands higher than 73% of all other readings from the past year, pointing to a healthier-than-usual appetite for bearish bets of late. 

Echoing that, Humana Inc's (NYSE:HUM) Schaeffer's put/call open interest ratio (SOIR) is docked at 2.78, suggesting short-term puts outnumber their call counterparts by a nearly 3-to-1 margin. What's more, this ratio sits in the 99th percentile of its annual range, showing that near-term traders have rarely been more put-biased during the past year. 


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