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VIVUS' Dismal Earnings Don't Deter Call Players

One spread strategist predicts a longer-term rebound for VVUS

by 11/7/2012 9:42 AM
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The shares of VIVUS, Inc. (NASDAQ:VVUS - 11.18) plummeted almost 21% on Tuesday, after the company reported a wider-than-expected third-quarter earnings loss. Nevertheless, call players were out in full force, as roughly 69,000 of these options changed hands yesterday. This was nine times the security's average single-session volume, and almost double the number of puts traded.

It appears that a large chunk of the volume crossed in the form of a bull call spread. Specifically, a block of 8,736 calls was bought at the March 2013 13 strike for $1.43 each, while an equal number of calls were simultaneously sold at the March 2013 20 strike for $0.28 apiece -- resulting in a net debit of $1.15 for each spread purchased. By utilizing this strategy, the trader is counting on the stock to muscle north of breakeven at $14.15 (the purchased strike plus net debit) prior to March expiration. Although the play limits his risk to the net debit paid, his maximum profit is capped at $5.85 (difference between strike prices, minus net debit), no matter how far the equity climbs over the next few months.

This slant toward VVUS calls over puts was prevalent well before Tuesday's session, however. Traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 277 calls for every 100 puts during the past few months. This 50-day call/put volume ratio of 2.77 resides in the 66th percentile of its annual range, reflecting a healthier-than-usual appetite for bullish bets over bearish lately.

Elsewhere, short interest on VVUS spiked by more than 11% during the most recent reporting period, and now represents a hefty 20% of the equity's available float. In fact, it would take more than a week to buy back these shorted shares, at the stock's average pace of trading. This raises the possibility that some of the aforementioned buy-to-open call volume is the result of hedging activity by short sellers.

In terms of analyst coverage, six brokerage firms have bestowed "buy" or better ratings upon VVUS, compared to four "holds" and one "sell" suggestion. Meanwhile, although the stock received price-target cuts at Jefferies and Roth Capital this morning, Thomson Reuters still pegs the security's average 12-month price target at $32.67 -- representing expected upside of a whopping 176% to Tuesday's closing price of $11.82.

Technically speaking, the biopharmaceutical issue has trekked almost 24% higher from the year-ago period, but has underperformed the broader S&P 500 Index (SPX) by roughly 48 percentage points during the past two months. What's more, yesterday's plunge put the equity on pace to finish the week below its 100-week moving average for the first time in more than a year. It remains to be seen whether the security will recover in time for today's trader to realize a profit on his call-spread strategy.


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