The Pharma Stock Options Bulls Should Be Watching

VRTX tends to fare well after tests of its 40-day moving average

Sep 14, 2017 at 2:32 PM
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As the Dow trades near record highs, the Nasdaq is trading lower amid pressure from biotechs. One drug stock in the red is cystic fibrosis specialist Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This retreat could create a compelling opportunity for options traders, though, as VRTX tests a key trendline with historically bullish implications.

Volatility Expectations Are Low on VRTX Stock

VRTX is trading down 2% at $153.74, not far from its 40-day moving average at $155.70. According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, previous tests of this trendline over the past three years have yielded positive five-day returns two-thirds of the time, with an average gain of 3.44%.

Looking at the 21-day performance, VRTX is positive 63% of the time. The average return, however, is slightly more bullish at 5.64%.

Up nearly 109% year-to-date, Vertex Pharmaceuticals stock hit a record high of $167.86 on July 25, around the same time VRTX's Relative Index Strength (RSI) peaked above 80. The stock's RSI was last seen at 48.2, following VRTX's consolidation into its 40-day moving average.

Additionally, VRTX has fared well amid an increase in short-covering activity, which points to its deep-seated technical strength. During the last two reporting periods, short interest on VRTX grew 13.5% to 4.14 million shares -- or 3.2 times the stock's average daily trading volume.

For option players looking to profit from another Vertex Pharmaceuticals stock rally off its 40-day moving average, now may be a good time to do so. VRTX's Schaeffer's Volatility Scorecard (SVS) sits at 91, indicating the biotech stock has tended to exceed option traders' volatility expectations during the past year. What's more, VRTX's 30-day at-the-money implied volatility stands at 31.3% -- in the 18th annual percentile -- which strengthens the case for relatively attractive short-term options premiums.

VRTX since Sept 14 with 40-day moving average

 

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