Big Moves in Store for CVS?

CVS Caremark Corp. (CVS) shares closed up 39 cents to $31.08 on Thursday, which is 18% off its October highs of around $37, and at least one investor is looking for a big move in either direction throughout the next month.

The investor bought 5,000 December 31-32 strangles for around $1.58 per spread with CVS shares trading at $31.16. The out-of-the-money December 32 calls closed up 15 cents, and the at–the-money December 31 puts closed down 20 cents. This CVS strangle buyer contributed to the 10,700 December 32 contracts that traded today. The December 32 calls were home to open interest of 6,700 contracts, and the December 31 puts were home to 352 contracts of open interest.

Investors who expect a surge in the stock in either direction could buy strangles when volatility in the market is relatively low. The investor is looking for CVS shares to either rally higher than $33.58 or break lower than $29.42. The maximum risk in this long strangle is the premium paid, or $1.58 per strangle.

Prior to the sell-off in October, CVS shares saw a nice rally from their March low of $24.92.

It’s interesting that we’re seeing a strangle buyer today, as we wrote about a straddle seller in the company a couple weeks ago. On Nov. 6, the day after CVS beat earnings-per-share estimates by one cent, we saw an investor sell the December 30 straddle 5,500 times to collect $2.81 per straddle. The fact that we are now seeing buyers of options in the December series indicates that implied volatility may have hit a level where people are more interested in owning premium than selling it. The implied volatility of today’s strangle was 28, compared to a 34 when the December 30 straddle was sold on November 6.