Teva Pharmaceutical Options Traders Target Puts Ahead of Earnings

Teva Pharmaceutical Industries Ltd's (ADR) (TEVA) less-than-stellar earnings history could be encouraging for put buyers

Feb 10, 2017 at 10:46 AM
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Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has been a long-term laggard on the charts, dropping over half its value since topping out at a record high north of $72 in mid-2015. Today the shares are up fractionally at $32.27, after earlier coming within pennies of a fresh 10-year low, following a downgrade to "underperform" from "neutral" at Mizuho, which also slashed its price target on TEVA to $27 from $40. The drug stock has struggled this week in the wake of a CEO split, and options traders have been targeting puts ahead of the company's earnings report, due before the open Monday morning.

Today's downbeat brokerage note is not quite an outlier, with more than half of the 16 analysts following TEVA rating the shares a tepid "hold." Still, the downgrade marks the first equivalent of a "sell" recommendation, meaning there's plenty of room for analysts to continue lowering their opinions, particularly if earnings disappoint. Plus, the average 12-month price target of $42.09 represents a nearly 30% premium to current levels, and a region TEVA hasn't seen on a closing basis since early November.

Elsewhere, short interest on TEVA has doubled since early September, with nearly 20 million shares devoted to these bearish bets. However, this accounts for just 2.2% of the stock's total float, leaving plenty of room for more bears to pile on -- which could put extra pressure on the shares.

Turning to the options pits, TEVA has seen a notable uptick in put buying lately. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.87 ranks high than nearly four-fifths of the past year's readings. Plus, put open interest across all series is currently seated just 1 percentage point from a 52-week high, with 304,293 contracts outstanding.

Near-term options traders are likewise put-skewed, per TEVA's Schaeffer's put/call open interest ratio (SOIR) of 1.05 -- in the 96th percentile of its annual range. Plus, the equity's gamma-weighed SOIR of 1.68 shows put open interest outweighs call open interest by a wide margin among near-the-money options in the front three-months' series.

That said, not every put player is a bear. After all, TEVA has seen roughly 1.60 puts sold to open for each one bought over the past 50 days, according to data from the major options exchanges. In fact, peak near-term put open interest resides at the underfoot February and March 30 strikes -- with more 36,700 contracts collectively outstanding -- where a large number of positions have been sold to open. Simply stated, these put writers are betting on the $30 mark serving as a short-term floor for the shares.

If some options traders are betting on a downside move for TEVA after earnings, however, that wouldn't be a huge surprise. Over the past eight quarters, the shares have moved lower in session after reporting four times. Notably, the most recent quarter saw TEVA shed 8.4% in the post-earnings session. The options market is currently pricing in a swing of 6.8% in either direction for Monday's trading -- much wider than the average singe-day move of 2.6%.

All said, TEVA simply hasn't given shareholders much to cheer about for some time. The shares are down 40% year-over-year, and were rejected earlier this week near $34.50, home to their December lows. But with plenty of room for bears to climb on board, a negative earnings result could easily send Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) sliding to lower lows.

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