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Option Bears Hit Achillion Pharmaceuticals, Inc. (ACHN) On News

The FDA's decision on ACHN drug sparked a surge in put buying

by 9/30/2013 2:21 PM
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Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) is getting slammed today, down nearly 60%. The steep move into the red stems from the Food and Drug Administration's (FDA) decision to keep ACHN's experimental hepatitis C drug sovaprevir on hold, due to less-than-satisfactory trial results. At the same time, the stock has been placed on the short-sale restricted list, which in turn has driven put volume to 28 times its normal intraday amount, led by the January 2014 5-strike put and the October 7.50 put.

More than 14,100 contracts have traded at the January-dated strike, with three-quarters crossing at the ask price, suggesting they were purchased at a volume-weighted average price (VWAP) of $2.08. At the same time, implied volatility (IV) has surged over 12 percentage points, hinting at the creation of new bearish bets. In order for the put buyers to profit, they need the shares of Achillion Pharmaceuticals to sink past $2.92 (January strike price less VWAP) by options expiration in roughly four months. Currently, the stock is perched two cents above that mark, at $2.94, but earlier, it touched a near three-year low of $2.87.

Similarly, at the front-month strike, a majority of the contracts have traded on the ask side, IV has more than doubled, and volume outstrips open interest. Taken together, these data points suggest a portion of the 8,000-plus puts changing hands were bought to open for a VWAP of $4.25. In order for the bears to profit from this play, they need the shares to maintain their position beneath $3.25 (October strike less VWAP) throughout the option's lifetime. If ACHN rebounds above the strike, however, the most the speculators can lose is the initial premium paid.

Elsewhere, Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) was hit with a round of analyst downgrades and price-target cuts, due to the FDA news. For example, Baird cut its rating to "neutral" from "outperform" and its price target to $4 from $12, while JMP Securities, Piper Jaffray, William Blair, and Bank of America-Merrill Lynch also downgraded ACHN.

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