2 Biotechs That Could Bomb After Earnings

If history is any indicator, things could get ugly after earnings for ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) and Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA)

Nov 4, 2016 at 12:24 PM
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Earnings season has resulted in some sharp moves for biotech stocks. For that reason, it's worth noting next Monday boasts a deep lineup of drugmakers ready to enter the earnings confessional. Among them are ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) and Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA).

ACAD will report earnings after the close on Monday. Historically, most of the shares' big post-event swings have been to the downside. Looking back eight quarters, the biotech stock has plunged in the session following earnings half the time, with an average single-day loss of 8.8%. That compares with an average gain of just 1.6% after the other four reports.

Ahead of earnings, ACAD is up sharply. At midday, the shares have added 4.3% to trade at $21.76. Yet, the stock has also sold off considerably, relative to its most recent high of $36.59 in late September, shedding about two-fifths of its value in less than two months.

Understandably, short sellers have been piling on ACAD. Over 19 million shares have been sold short, or about 22% of the stock's float. At the same time, these bearish bettors may be hedging their positions ahead of earnings, via protective calls. During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 10.60 ACADIA Pharmaceuticals Inc. calls for every put -- with a recent rush toward bullish bets inspired by buyout buzz.

Turning to fellow biotech ARIA, the company is scheduled to report earnings Monday morning. In the past, things haven't been pretty for the shares in the immediate aftermath of these events. Specifically, the stock has finished six of the past eight post-earnings sessions lower.

In light of this, it makes sense that options traders have been targeting ARIA puts over calls. The stock's 20-day ISE/CBOE/PHLX put/call volume ratio checks in at 1.59, while its front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) -- which measures near-the-money open interest in the November series -- is a top-heavy 2.06.

Today, Ariad Pharmaceuticals, Inc. is 1.4% higher at $8.78, bringing its year-to-date gains beyond 40%. However, the biotech stock has had a brutal quarter, down about 36% since the start of October, and is now struggling to overcome its 160-day moving average.

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