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Trader Takes $38 Million Bet in Merck to the LONG Side

TradingPub Admin | June 18, 2013

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Special thanks to our pals over at Keene on the Market for the following guest post on Trader takes a $38 Million Bet in Merck to the LONG Side

Merck & Co., Inc. is a giant in the world of health care and pharmaceuticals, with a market cap of 145.5 billion. Merck’s earnings suffered greatly when its fleet of name brand drugs lost their patent protection. It is a dilemma that the entire pharmaceutical industry has been plagued with however it hit Merck the hardest as it refused to curb its R&D spending unlike the rest of its peers. Under ex-Research Chief Peter Kim, the R&D department was hemorrhaging money and had Wall Street investors running for the hills.

In April, Roger Perlmutter was tapped to replace Kim as the head of the research department and has since made some drastic cutbacks. For starters, he replaced an entire board of senior management and replaced them with an entire new team of senior leaders. MRK shares have been on a steady climb since the announcement of this change in leadership in March

On Monday, Merck & Co. had its stock “outperform” rating reaffirmed by analysts at Sanford C. Bernstein. The firm has a $49.00 price target on the stock

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. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial.  We offer this service through our 7 hour daily LIVE trading room http://bit.ly/135QWt8 or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long: http://bit.ly/11f0L9u.

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

The “Institutional Trade”: A trader bought 100,316 MRK Oct 45 Calls for $3.80

Their Risk: $38,120,080
Their Reward: Unlimited
Their Breakeven: $48.80

I saw this very similar trade in PG on 2015, but this trades really perked my interest.  Today, a trader bought 100,316 MRK Oct 45 Calls for $3.80 vs an Open Interest of 30k.  This means this trader will lose:

3.80 * 100* 100,316= $38,120,080 if the stock closes under $45 on October expiration, assuming they have no stock position on against this trade.

WOW, that is a  BET.

(Full Disclaimer: I have no position on in MRK)