Lower Volatility Bet on CVS

CHICAGO (TheStreet) -- CVS Caremark(CVS Quote) is seeing investors bet on decreased volatility a day after the pharmaceutical retailer announced earnings.

In other news, CVS announced that its board approved a new share repurchase program for up to $2 billion of its outstanding common stock. But news that the company was lowering its guidance for the PBM (pharmacy benefit) business sent the bears into action and before the closing bell mercifully sounded. CVS was off 20%.

The hype surrounding earnings ran up implied volatility on CVS to 39%, compared to week-ago levels of about 29%. With the news now out of the way, implieds are getting crushed. One way to gauge this is by looking at the front-month, at-the-money straddle.

On Wednesday night, this spread was priced at $2.15, or 7.5% over strike (investors who bought this straddle, expecting more volatility, made a nice profit!). By Thursday's close, the straddle had dropped to $1.77. Today so far, it dropped further to $1.55. In other words, the options market expects a move of 5.2% in the stock during the next two weeks before November options expire.

Today, an investor sold the December 30 straddle 5,500 times, collecting $2.81 per straddle. Blocks traded at 12:09 p.m. EDT, with the December 30 put being sold for $1.70 and the December 30 call selling for $1.11.

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