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Bullish attention has intensified on Teva Pharmaceutical Industries Ltd (ADR) (TEVA - 37.98) in recent days as the generic drug manufacturer makes headway with its latest multiple sclerosis treatment. Last Thursday morning, TEVA announced successful results for its dose trial, which attempted to administer a different-sized dose of a new medication fewer times each week.
The stock hasn't made much headway in the ensuing sessions, but we've seen call volume ramp much higher. In the past five days at the International Securities Exchange (ISE), more than 7,000 calls have been bought to open versus just 140 puts. This places TEVA on the list of the top-25 call/put volume ratios for the past five trading sessions.
Looking ahead to the next three months' series, the majority of TEVA call volume is out-of-the-money, and heavy overhead call volume could prove challenging should the shares begin to crawl higher. In the July series, there are more than 14,000 open calls at the 42.50 strike and more than 12,000 open 40-strike calls. In September, open interest is even more robust, with 28,000 open 45-strike calls and 23,500 open 42.50-strike call contracts.
Note that some of these out-of-the-money calls may have been sold to open as covered calls. Implied volatility is well above short-term historical volatility (roughly 29% versus 16% for the last 20 days). This makes options relatively expensive, which is a plus for option sellers and a negative for option buyers. Even if sold to open, the mere presence of overhead calls could be headwind for the already underperforming shares.
On a technical basis, TEVA has shed almost 19% year over year and is off 6% in 2012. What's more, the shares have lagged the S&P 500 Index (SPX) by nearly nine percentage points in the past three months. Early last month, the stock faced rejection at its 80-week moving average, below which TEVA shares have been trading since February 2011.
Today, option volume is noteworthy on TEVA, with call volume running three times ahead of average while put volume is quintuple the norm. It appears, however, that the majority of this volume is on the closing side of the tape.