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Perrigo Option Traders Remain Skeptical

PRGO's May 110 call is seeing sell-to-open activity today

by 12/26/2012 11:12 AM
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Calls are flying off the shelves on Perrigo Company (NASDAQ:PRGO - 103.03) in today's session. Nearly 3,300 contracts have changed hands, representing more than 149 times the average intraday volume for call options. As a point of comparison, just two puts have crossed the tape.

The lion's share of today's call volume has centered on PRGO's May 110 strike, which has seen close to 3,200 contracts trade. Roughly 68% of these have gone off at the bid price, and volume is easily outstripping open interest, suggesting new positions are being initiated here.

By selling these calls to open, traders expect PRGO to stay south of the $110 mark through May expiration. In this best-case scenario, the options will expire worthless, and the speculators can pocket the initial net credit of $3.48 per contract, which Trade-Alert indicates is the volume-weighted average price (VWAP). However, considering this strike is currently about 7 points out of the money, this could also be part of a covered-call strategy, in which shareholders are looking to increase their rate of return over the next few months. Should PRGO power above the strike price by May 17, though, the investors would be required to deliver the stock at $110, regardless of how high it goes.

Expanding the scope, traders have been using traditional means to bet bearishly on the stock in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 338 puts for every 100 calls during the past 50 sessions. This put/call volume ratio of 3.38 ranks in the 99th percentile of its annual range, indicating long puts have been scooped up at a faster clip just 1% of the time within the past year.

The skepticism surrounding PRGO is understandable given its recent struggles on the charts. Since hitting a record peak of $120.78 on Oct. 5, the shares have surrendered 14.7% of their value. Additionally, the stock took an earnings-induced slide in early November, and has spent the subsequent weeks wallowing beneath its 60-week moving average.

This dismal price action has continued in today's session, with PRGO down around 0.5%. At last check, the stock was seen trading at $103.03.


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