A trader or group of traders has recently invested $5 million in half a million call options on Bright Health Group, Inc., a small healthcare company. This substantial wager is uncommon for a relatively obscure microcap firm with infrequent options trading. Initially, the price paid—between five and ten cents each, targeting shares at $2.50 each—appears to be an attractive bargain given that the stock currently trades around $14. However, the situation is complicated by a reverse stock split approved in May that necessitated a price adjustment for options contracts.
The reverse stock split granted each shareholder the right to receive 0.0125 new Bright Health Group, Inc. Common Shares, according to the Options Clearing Corporation, which also provides clearing and settlement services for derivatives. This move also provided compensation—or cash in lieu—calculated as a fraction of BHG shares. This brought about significant logistical challenges, necessitating the adjustment of the options price and changing the option symbol to BHG1 from BHG. The cash in lieu amount was determined to be $2.26 per BHG1 contract.
After the adjustments, the price of the new Bright Health Group, or BHG1, contract is approximately $0.16. Thus, the buyer(s) have effectively spent nearly $5 million for the right to buy an asset if it rallies at least 1,462% to above $2.50 by the November 17 expiration date. This substantial bet has led Steve Sosnick, chief strategist at Interactive Brokers, to suggest two possibilities: either the trader is incredibly bullish on the company or the trade was based on a misunderstanding.
If the trader misunderstood the situation, it's unclear exactly what they may have been thinking. One possibility is that they confused the effective price of BHG1—perhaps believing it traded close to the cash in lieu amount of $2.26. Alternatively, they may have thought the underlying option was worth $16, not $0.16, and therefore assumed they were buying a heavily in-the-money call option. However, as Sosnick warns, when trades seem too good to be true, they usually are, suggesting the latter scenario could be a costly mistake for the trader.
