Trader Takes a Huge Volatility Position in ELN

Elan Corporation (ELN, $14.45, up $0.35) announced their Q2 earnings this morning and stated a profit that exceeded expectations from Wall Street. The company discussed how their EPS increased to $4.28, which beat analyst estimates by $0.02. Their earnings were largely impacted by the transaction of the blockbuster drug Tysabri, which was a significant portion of their quarterly revenue. The company has continued to make a royalty of 12% on Tysabri during the months of May and June. Elan stated that it ended their second quarter with $1.9 billion in cash and a net loss from continuing operations of $251.8 million.

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days.  Remember that a large number of participants in the equity options market are hedgers.

The “Institutional Trade”:

A trader bought 15,000 ELN Sep 12 Put, Sep 14 Call Strangle for $1.10 debit.  A Strangle is buying a call (14 strike) and a put (12 strike) with different strike prices.

Their Risk:       $110 per 1 lot
Their Reward:  Unlimited to the upside, substantial to the downside
Their Breakeven: $10.90 and $15.10 (excludes transaction costs)
Cash Outlay:    $1,650,000