Sponsored By:

Wright Medical Group (WMGI)

March 17, 2009

"Buy to open" the WMGI Aug 15 Calls (QWMHC) for $1.25 or less, and "sell to open" the WMGI Aug 12.50 Puts (QWMTV) for $1.90 or more to collect a credit of 65 cents or more


Dear Fellow Options Traders,

Wright Medical Group Inc. (WMGI) is a manufacturer of replacement hips, knees, ankles, bone replacement devices, etc. Some of its replacement joints can be custom-made for the recipient so comfort levels with the new joint are high. The company has good products exposed to strong secular growth trends.

There is worry that, with a slowing economy, there will be a slowdown in replacement procedures. With more than $1 in earnings power and the stock at about $12.40, worries about a slowdown in the economy are largely priced into the stock.

What caught our attention is how well institutional option investors have traded options around this stock in 2009. Prior to the dramatic drop from the low $20s to the low teens, option investors were selling calls and buying puts. Since March 2, they have reversed course and have repeatedly been buying calls and selling puts. Given the unusual volume and precision of these option investments, we are convinced we should take these signals seriously.

We recommend that you "buy to open" the WMGI Aug 15 Calls (QWMHC) for $1.25 or less, and "sell to open" the WMGI Aug 12.50 Puts (QWMTV) for $1.90 or more to collect a credit of 65 cents or more.

However, because both legs of this trade are bullish, if you do not have the trading authorization or feel uncomfortable selling puts, we believe buying the calls on a stand-alone basis is a good investment for this particular trade.

With regard to the selling the 12.50-strike puts, WMGI has never traded below $11.17 per share. When we collect a 65-cent credit on the trade, we are not exposed to the downside unless the stock drops to $11.80.

We believe this represents an excellent risk/reward picture, as we are being paid to open the trade by selling the puts, and we have unlimited upside potential with our call position.

Have a great day trading.


Nick Atkeson and Andrew Houghton
Editors
Options Trader