LEAPS Call Buyer Amid CVS Rally

CVS Caremark Corp. (CVS) is trading roughly 18% off its October high of $38, but at least one investor expressed a bullish bet on the pharmacy services company and bought LEAPS calls looking for further upside throughout the next two years.

Today, Goldman Sachs (GS) published a note reiterating its “buy” recommendations on CVS and Express Scripts (ESRX), painting pharmacy benefit managers (PBMs) in a positive light, helping to boost CVS stock 26 cents on the day. The jump higher in the shares was a bit of a relief rally after the stock sold off Wednesday on rumors of a possible excise tax on the sector. At least one investor thinks the stock has much more room to rally and put on a longer-dated position, which factors in more volatility without time decay concerns.

The January 2012 40-strike calls traded more than 24,000 times today versus open interest of just 160 contracts. This means an investor traded this big lot to open. The calls were unchanged on the day, and had an implied volatility of 31.

We saw one investor purchase these options for $3 per contract, which means the investor could be expecting the stock to close higher than $43 come January 2012 expiration. If the stock spikes significantly throughout the next two years, this call buyer could choose to book profits by selling the options rather than wait for expiration.

Normal daily options volume in CVS is approximately 12,000 contracts across all strikes. The call buying activity we’re highlighting here more than doubled usual volume in the company, thanks to an investor with a long-term bullish bet.