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Danish drug-maker Novo Nordisk A/S (ADR) (NYSE:NVO – 166.46) is falling like a stone in morning trading on the news that its latest diabetes drug is being sent back for more testing by federal regulators. And option traders have turned bearish this morning as well -- there have been 31 times more puts traded than normal so far. (Volume is relative, as roughly 650 puts have changed hands, versus the 21 that trade on a typical day by this point in the trading session.)
One of the most-active contracts is the February 165 put. Almost all of the contracts traded at the ask price, and volume almost doubles open interest, indicating that at least some of these were bought to open. With a volume-weighted average price (VWAP) of $1.74, the stock needs to be at or below $163.26 (strike minus VWAP) at the close on Friday (this month's expiration date) for the option to break even or better. That's a 1.9% drop from its current trading level. If the shares fail to make this move, all the traders would lose is the premium paid.
Overall short-term option trading sentiment has been mixed for NVO recently. The stock's Schaeffer's put/call open interest ratio (SOIR) stands at 0.75, meaning that calls are outnumbering puts among options with a shelf-life of three months or less. That measure is only in the 46th percentile of similar readings taken in the last 12 months, meaning traders are not as put-heavy as they have been in the past. But data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) indicates a 10-day put/call volume ratio of 0.58. While that might appear low, it stands in the 65th percentile of similar readings in the last year -- meaning traders are buying to open puts at an accelerated rate recently.
But given how the market reacted this morning to the announcement that the Food and Drug Administration was calling for more tests on NVO's developmental diabetes drug Tresiba, the onrush of short-term put buying might not be such a bad bet, especially since short selling has been restricted due to today's plunge lower. NVO is down more than 13% so far today and is continuing to trend downward. This move is helping fade what had been a year-to-date gain of nearly 18% at one point, and the stock is still up more than 23% year over year. In fact, it had recently hit its record high of $194.44 last week. And NVO had been on a steady climb since reaching its 12-month low of $129.41 on June 4.