5 Reasons We Rejected This Biotech Options Trade

Why a Schaeffer's trader rejected a put option on Bristol-Myers Squibb (BMY) stock

Feb 27, 2017 at 12:51 PM
facebook twitter linkedin


Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior Trading Analyst Bryan Sapp chimed in on one stock he was recently toying with -- but ultimately rejected -- for a bearish options recommendation: biotech stock Bristol-Myers Squibb Co (NYSE:BMY).

What He Liked About a BMY Put Trade

Specifically, BMY shares caught Sapp's eye because:

  1. The stock has struggled on both a year-to-date and year-over-year basis.
  2. BMY is rallying back into the $56-$57 area, which served as resistance multiple times in 2016.
  3. Bristol-Myers Squibb recently announced disappointing news for Opdivo -- a drug many had high hopes for -- and the stock subsequently tanked.
  4. A mass exodus of options bulls could translate into added downside. BMY sports a Schaeffer's put/call open interest ratio (SOIR) of 0.44 -- in the bottom quartile of its annual range. Likewise, on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BMY has racked up a 10-day call/put volume ratio of 7.73 -- higher than 93% of all other readings from the past year.
  5. The stock's near-term options are attractively priced. The equity's Schaeffer's Volatility Index (SVI) of 27% is in just the 22nd percentile of its annual range, and its Schaeffer's Volatility Scorecard (SVS) of 85 indicates BMY has tended to exceed options traders' volatility expectations over the past year.

Why He Backed Out of a Bearish Bet

However, there were five reasons Sapp ultimately chose not to recommend BMY put options:

  1. Activist investor Carl Icahn recently announced he took a position in BMY, and will pursue a sale of the company. That creates a lot of headline risk.
  2. The shares have completely retaken the bear gap from the aforementioned Opdivo news -- somewhat of a non-event and likely washed out a lot of longs.
  3. BMY shares are back above their 50- and 80-day moving averages.
  4. There's an open gap overhead near $60, from Jan. 10. BMY shares could still rally to there and remain in a longer-term downtrend.
  5. Given how much volume has traded on BMY near the $56-$57 area, it could get choppy for a while. There's no sense in buying premium unless you have reason to believe something can move big, and quickly.

BMY stock chart Feb 27

 

Don't miss Schaeffer's free weekly stock market forecast. Sign up now for Monday Morning Outlook.

A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 
Special Offers from Schaeffer's Trading Partners