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Skeptical Traders Set a Top for Gilead Sciences, Inc. (GILD)

Call sellers are confident Gilead Sciences, Inc. will spin its wheels below $70

by 4/10/2014 2:37 PM
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Option Brief: Gilead Sciences, Inc. (NASDAQ:GILD) is marching south in step with the broader equities markets this afternoon, off 6.3% at $66.19. Meanwhile, demand is strong in the biopharmaceutical firm's options pits, with overall volume tripling the expected intraday amount. Against this backdrop, the stock's 30-day at-the-money implied volatility (IV) reached a 52-week high earlier, and at last check, had tacked on 18.6% at 49.5%.

Although GILD call volume doubles put volume, not all of the call trading is of the typical bullish sort. In fact, volume at the equity's April 70 strike -- which is the security's most active option, with more than 10,500 contracts on the tape -- is being driven by sellers, evidenced by the fact that the majority of the transactions have occurred at the bid price. What's more, IV is 11.9 percentage points higher at the strike, and volume outstrips open interest, pointing to freshly minted neutral-to-bearish positions.

In short, today's GILD call writers are anticipating the shares will remain perched below the strike through expiration next Thursday afternoon -- when front-month options cease trading. If that happens, the contracts will expire worthless, and the traders will retain 100% of the initial premium collected as their maximum potential reward. However, if the stock rallies above the strike, the sellers could be assigned -- in which case, they may be forced to sell the shares for $70 apiece, no matter how much they're worth.

On the fundamental front, Gilead Sciences received a $1 price-target hike to $121 at Nomura this morning. However, this has been overshadowed by news that Natco Pharma Ltd is attempting to block the patent of the company's new hepatitis C drug, Sovaldi, in India. Also, on April 22, GILD is scheduled to report first-quarter earnings. Following the firm's last quarterly report, despite a 5-cents-per-share earnings beat, the shares shed nearly 5% in the ensuing session.

Looking at the charts, Gilead Sciences, Inc. (NASDAQ:GILD) is down about 12% in 2014, and has underperformed the broader S&P 500 Index (SPX) by more than 16 percentage points during the last two months. This morning, the stock ran into a layer of resistance at its descending 10-day moving average, as well.


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