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Optimism Grows as Walgreen Stares Down Resistance


The end of a long-time dispute with ESRX has fueled accelerated options trading on Walgreen.

Options traders are targeting Walgreen Company (WAG) with a vengeance today, especially on the call side of the tape. At last check, the pharmacy concern has already seen roughly 64,000 calls and 36,000 puts change hands, compared to its average intraday volume of fewer than 7,800 calls and 5,300 puts.

Turning first to puts, speculators are scooping up the stock's now at-the-money July 34 put, which has seen nearly 10,400 contracts traded on open interest of fewer than 6,000. Plus, the majority of the puts have crossed at the ask price, suggesting they were bought. By purchasing the puts to open, the buyers are betting on WAG to retreat back beneath the $34 level by the end of the day tomorrow, when July-dated options expire.

Meanwhile, it looks like one trader may be upping the bullish ante on Walgreen. Specifically, symmetrical blocks of 1,000 contracts changed hands at the same time on the August 31 and August 33 calls. The 31-strike calls crossed for the bid price of $3.86, suggesting they were sold, while the 33-strike calls traded for the ask price of $2.12, implying they were likely bought.

Against this backdrop, the investor could be taking profits on the now in-the-money 31-strike calls, and using some of the funds to purchase the 33-strike calls. If that's the case, the speculator walked away with $1.74 per pair of calls (minus what he originally paid for the August 31 calls), and could make more money as Walgreen extends its rally beyond the 33 strike.

Elsewhere, the analyst crowd is also waxing optimistic on Walgreen. Earlier today, S&P Capital IQ raised its price target on the stock to $37 from $33. However, there's plenty of room for more analysts to follow suit. The average 12-month price target on the equity stands at $35.36 -- just a hop, skip, and a jump from WAG's current price. Plus, only nine out of 19 analysts consider WAG a "buy" or better, leaving the door wide open for upgrades.

Technically speaking, the shares of WAG have muscled more than 10% higher today, after the firm settled a long-running pharmacy-network dispute with Express Scripts Holding Company (ESRX). As such, the stock is poised to end the week north of its 50-week moving average for the first time in almost a year. However, the security could run into a familiar speed bump in the $35-$36 neighborhood, which has halted most of Walgreen's rally attempts since August 2011.

What's more, the July 34 and 35 strikes harbor more than 48,000 open calls combined. This abundance of bullish bets could exacerbate resistance in the region through the end of the week.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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