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Short-Term Bulls Take Over Merck Options Pits

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MRK's November 50 call attracts the most attention.

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Options traders are picking up calls on Merck & Co., Inc. (NYSE:MRK) at a rapid-fire rate today. Specifically, 21,000 calls -- nearly three times the intraday norm and six times the number of puts -- have crossed the tape thus far.

Most of MRK's traders have focused their attention on the November 50 call, where more than 10,200 contracts have changed hands for a volume-weighted average price (VWAP) of $0.49. More than three-fourths of the contracts -- including several mid- to large-sized blocks -- went off at the ask price, implied volatility has ticked higher, and volume has exceeded open interest at the strike, suggesting the initiation of fresh long calls. In addition, data from the International Securities Exchange (ISE) confirms some of this activity was of the buy-to-open sort.

In order for today's call buyers to profit from their plays, MRK has to travel into territory last reached in January 2008. Specifically, the stock has to climb at least 5.4% from its current perch of $47.90 to finish atop the breakeven rail of $50.49 (strike price plus the VWAP) by the close on Nov. 15, when back-month options expire. As of now, the call has a roughly 1-in-4 chance of making its way into the money during its lifetime, according to its delta of 0.27, or 27%.

The initial cash outlay for this out-of-the-money call is relatively expensive, considering the call's implied volatility of 18% towers over MRK's two-month historical (realized) volatility of 7.8%. Should MRK fail to advance past the $50 mark over the next seven-plus weeks, this somewhat inflated premium is what today's call buyers stand to lose.

On the technical front, Merck has tacked on more than 17% since the start of 2013, and is up 0.5% at last check on news that Oxytrol was released nationwide yesterday, becoming the first over-the-counter treatment for overactive bladder in women. Of note, MRK is scheduled to report fiscal third-quarter earnings between Oct. 21 and Oct. 25. While the drug maker bested consensus bottom-line estimates in all of the last eight quarters, its shares still fell, on average, 0.82% the following week.

This article by Milissa Hudepohl was originally published on Schaeffer's Investment Research.

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