Market Insights

Merck has been dropping for almost a year, and one big option trader may expect further downside.

This large transaction was detected yesterday morning in the pharmaceutical giant:

• Roughly 8,000 May 75 puts were purchased for $1.35.
• A matching number of May 70 puts were sold for $0.35.
• Volume exceeded open interest at both strikes, which suggest a new vertical spread was implemented.

Puts fix the price where investors can sell a security, so they often gain value when shares fall. Traders can also also sell puts to generate a credit, lowering the cost of a position. That can result in increased leverage on a defined move.

In this case, the trader stands to collect $5 if MRK closes at $70 or lower on expiration. He or she paid a net $1 for the spread, so they could gain a potential profit of 400 percent from the stock declining less than 15 percent. The position will expire worthless above $75.

MRK ended Thursday’s session up 1.4 percent at $79.84. However it’s down 36 percent in the last 10 months and is the worst-performing member of the Dow Jones Industrial Average over that period.

Merck (MRK), weekly chart, showing levels cited above.

While the Keytruda cancer treatment has enjoyed strong demand, other products like Gardasil have struggled. The company started falling after cutting guidance last July and continued lower after the two following quarterly reports. It beat estimates yesterday but trimmed estimates because of expected tariff costs.

MRK has been trying to hold prices from March 2022. Yesterday’s put spread anticipates a potential move to levels last seen in September 2021.

Overall option volume was about twice the daily average yesterday, according to TradeStation data.

Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See www.TradeStation.com/DisclosureOptions. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.

Margin trading involves risks, and it is important that you fully understand those risks before trading on margin. The Margin Disclosure Statement outlines many of those risks, including that you can lose more funds than you deposit in your margin account; your brokerage firm can force the sale of securities in your account; your brokerage firm can sell your securities without contacting you; and you are not entitled to an extension of time on a margin call. Review the Margin Disclosure Statement at www.TradeStation.com/DisclosureMargin.