Buy Call Options on These 2 Drug Stocks

Near-term options on ACADIA Pharmaceuticals Inc. (ACAD) and Zoetis Inc (ZTS) are pricing in low volatility expectations

Mar 7, 2017 at 11:12 AM
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Drug stocks are taking a hit this morning after last night's release of a plan to replace Obamacare by Republican members of Congress. Adding to the pressure was an early tweet this morning from President Donald Trump, who emphasized drug "pricing for the American people will come way down!" Still, plenty of pharmaceutical stocks look attractive at the moment, including ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) and Zoetis Inc (NYSE:ZTS) -- both of which have just flashed historically bullish signals, and are offering options for a bargain.

Short Sellers Hedge with Calls as ACADIA Outperforms

ACAD has been a solid performer since early November, when the shares bottomed out below $21. Up 88% year-over-year at $36.79, the stock recently found a foothold at the $36 mark. What's more, the shares last week pulled back to their rising 40-day moving average -- a signal that's boded well for ACAD in the past. Over the last three years, the stock has retreated to this trendline seven times. After 21 days, the shares averaged a healthy gain of 8.2%, and were positive 86% of the time.

Despite the stock's technical strength, short sellers have been betting against ACAD at record levels. In fact, the 23.1 million shares shorted is the highest level on record. These bearish positions also account for nearly one-quarter of the equity's total float, and would take about eight days to cover, at the stock's typical pace of trading. That's plenty of buying power to give ACAD a lift on the charts on a short-squeeze situation.

Options traders have taken a call-skewed approach to ACAD in recent weeks, per the stock's 50-day call/put volume ratio of 8.49 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- a reading in the 78th percentile of its annual range. But heavy short interest along with peak open interest at the deep out-of-the-money March 45 call suggest much of the recent call buying has come at the hands of short sellers looking for a hedge against more upside. Either way, now is a great time to get in on the action, as ACADIA Pharmaceuticals Inc.'s (NASDAQ:ACAD) Schaeffer's Volatility Index (SVI) of 65% is seated in the low 8th annual percentage, pointing to historically low volatility expectations being priced into the stock's near-term options.

Zoetis Options a Bargain as Stock Flashes "Buy"

After slipping out of the gate this morning, ZTS has clawed its way higher, last seen up 0.3% at $53.22. The shares have been steadily climbing for the past year, adding 32.3% over the last 12 months, with the 80-day moving average serving as frequent support. Speaking of this trendline, the shares pulled back from their February record high to rest just near the moving average. ZTS has touched the 80-day trendline 10 times in the previous three years, with generally upbeat results. After 21 days, the stock added 3.9% on average, with 78% of these returns being positive.

Like ACAD, Zoetis Inc (NYSE:ZTS) is offering up a prime opportunity for short-term options buyers at the moment. The stock's SVI of 18% is docked in the low 7th percentile of its 12-month range. Meanwhile, its 30-day at-the-money implied volatility of 16.9% ranks lower than 99% of all comparable readings from the past year. Together, these readings strongly suggest premium on ZTS options is well-priced, from a volatility point of view.

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