2 Biotech Stocks Beloved By Option Bulls

GILD and SRPT were among the biotechs making headlines today

Feb 8, 2016 at 4:59 PM
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Biotechs -- like most other sectors -- took it on the chin today, as many touch multi-year lows. Below, we'll take the options temperature of two biotechs that made headlines today: Gilead Sciences, Inc. (NASDAQ:GILD) and Sarepta Therapeutics Inc (NASDAQ:SRPT).

bucked the broader trend lower, after Barron's gave the stock a nod, saying the equity -- as well as Celgene Corporation (NASDAQ:CELG) -- "could trade 30% higher over the next year," and is "too cheap to ignore." As such, GILD was among the elite advancing equities, adding 0.1% to end at $85.26 today.

Gilead had been falling hard since hitting an all-time high of $123.37 last June, and touched an annual low of $81.89 last week, just before the company reported fourth-quarter earnings. But earnings and revenue exceeded analyst expectations, helped by strong overseas sales of two hepatitis C drugs, and the company upped its quarterly dividend.

Bullish sentiment is running near an annual high. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open about 5.7 GILD calls for each put over the past two weeks. Moreover, this ratio is higher than 99% of all comparable readings taken in the past year. Likewise, the security has a Schaeffer's put/call open interest ratio (SOIR) of 0.42 -- in the lowest percentile of its annual range, meaning near-term traders have been call-heavy in the extreme.

Still, the security has underperformed the S&P 500 Index (SPX) over the past three months, and is sitting on a 15.7% year-to-date loss, pressured lower by its 10-day moving average. Should Gilead Sciences, Inc. (NASDAQ:GILD) fail to break north, per Barron's predictions, an exodus of option bulls could exacerbate selling pressure.

News that the U.S. Food and Drug Administration (FDA) will delay its decision on SRPT's muscle-wasting disorder drug by about three months sent the stock down 12.11% to $10.74 -- and earlier to a new three-year low of $10.60. Sarepta fell hard in mid-January when the FDA suggested it may not approve the drug, and the shares have now given up 72.2% in 2016. In fact, over the last two months, SRPT has underperformed the SPX by a gut-wrenching 63 percentage points.

Today's drop could have option bulls running for the exits. The equity's 10-day call/put volume ratio at the ISE, CBOE, and PHLX stands at 30.56 -- higher than 94% of the past year's readings, indicating a healthier-than-usual appetite for long calls over puts of late.

In fact, it's possible that the abundance of recent call buying could actually be short sellers hedging their positions against an unexpected rebound. These bearish bets currently represent almost 27% of SRPT's total available float. 

Meanwhile, with analysts split evenly between "hold" and "buy" or better ratings, and an average 12-month price target still at a lofty $35.25, a round of downgrades and/or price-target cuts could send Sarepta Therapeutics Inc (NASDAQ:SRPT) to new lows long before an FDA decision is revealed.

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