$MRK bulls triple their money

Merck rallied with a Goldman Sachs upgrade today, turning big gains on upside option positions.

On March 13, Investitute’s tracking systems detected the purchase of 6,400 May $55 calls for $1.91 to $2.02 with shares at $55.39. These were clearly new positions, as open interest in the strike was only 804 contracts before the activity appeared. Investitute co-founder Pete Najarian cited the unusual activity at that time on CNBC’s “Halftime Report.”

Those calls traded for $5.31 this morning, nearly 3 times their initial purchase price. The stock rose 8.5% in the same time period, underscoring how options can far outperform their underlying shares.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

MRK was up 2.41% to $60.25 today. Goldman Sachs upgraded the pharmaceutical giant to “conviction buy” from “neutral” this morning and raised its price target on the name to $73 from $63.