Back from the Dead? High-Stakes Options Trade in Hospital Space

Back from the Dead? High-Stakes Options Trade in Hospital Space

A hospital company drowning in liabilities just reported good results. Now a trader is using options to position for a comeback.

Here’s a breakdown of the strategy detected yesterday afternoon in Community Health (CYH):

  • 20,000 September 4 puts were sold for $0.72.
  • 20,000 September 6 calls were bought for $0.87.

Short puts generate income and oblige the seller to buy stock if a certain level is breached. In this case, it’s $4.

Long calls fix the price where a security can be purchased, in this case $6. Both halves of the trade will profit from a rally and lose money to the downside.

The position is essentially a surrogate for owning 2 million shares, but with an initial outlay of just $0.15 per share. It will generate huge leverage on a breakout through $6, or massive losses on a drop through $4.

CYH rose 7.61 percent to $4.95 yesterday, and was up 25 percent in February. Most of the move occurred on February 21 after profits stabilized and higher admissions were forecast.

Community Health (CYH) chart showing “golden cross” and earnings gap.

Management also got easier terms from creditors — a big plus for a company whose credit rating is deep in “junk status.” Now it’s looking to capitalize on the better sentiment by issuing new bonds to refinance older debt.

Short interest could also be a factor because bets against the stock account for roughly one-quarter of its float. If bears are forced to “cover,” it can potentially result in a “squeeze” higher.

Valuation watchers may also be interested in CYH because it trades at less than 0.1 times revenue, less than one-tenth the ratio for better-capitalized peers like HCA (HCA).

The large trade pushed overall options volume to about 20 times CYH’s daily average in the last month.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.