Buy Calls On These 2 Biotech Stocks

Arrowhead Pharmaceuticals is presenting at a healthcare conference today

Mar 13, 2018 at 3:03 PM
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Pharmaceutical stocks went on a tear recently, with the iShares Nasdaq Biotechnology ETF (IBB) fresh off a seven-day winning streak -- its longest series of consecutive gains since March 2015. While the IBB is set to snap that streak today, a pair of high-flying biotech stocks could be ripe for more upside -- and their near-term options are a relative bargain right now: Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) and Arrowhead Pharmaceuticals Inc (NASDAQ:ARWR).

VRTX Flirts With Record Highs

Vertex Pharmaceuticals stock has been on fire recently, touching a record high of $178.25 earlier today, before pulling back 0.1% to trade at $176.89. The stock has now added more than 25% in just the past three months, with recent gains underlined by support at its 10-day moving average.

As such, VRTX landed back on our list of stocks trading near 52-week highs amid unusually low volatility expectations being priced into near-term options. Specifically, the biotech's Schaeffer's Volatility Index (SVI) of 28.1% is higher than just 8.9% of all other readings from the past year. The last time VRTX stock was trading near new highs with an SVI in the bottom 10% of its annual range, the equity went on to rally 12.42% over the next month, per Schaeffer's Senior Quantitative Analyst Rocky White. From current levels, another 12.42% surge in Vertex shares would place them around $198.86.

Speculators who expect an extended rally to record highs for VRTX could consider April 180 calls, which are currently asked at $6.10. Buyers of the calls would profit if the shares topped $186.10 (strike plus premium paid) by the close on Friday, April 20, when the soon-to-be front-month options expire.

However, keep in mind that Vertex call buying is nothing new. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open nearly nine calls for every put during the past two weeks. The resulting 10-day call/put volume ratio of 8.70 is in the 94th percentile of its annual range, pointing to a much healthier-than-usual appetite for bullish bets over bearish.

Nevertheless, VRTX stock is trading north of peak call open interest in the March and April series -- at the 175 and 160 strikes, respectively -- suggesting there's little in the way of potential options-related resistance in the short term.

Arrowhead Stock Could Surge

Arrowhead Pharmaceuticals stock scored a fresh annual high of $7.93 yesterday, after the company said it began dosing in a Phase 1 study of its liver disease treatment. Today, the shares are 1.8% higher at $7.68, with the company presenting at the Barclays Global Healthcare Conference today.

ARWR stock also appeared on our list of high-flying equities with options on sale. The security's SVI of 65.6% is higher than just 7.3% of all other readings from the past 12 months, pointing to muted volatility expectations being priced in. The last time ARWR shares were trading near new highs and simultaneously sported a low SVI, they went on to surge 12.37% in the subsequent month. A similar rally from current levels would put Arrowhead stock around $8.63 -- territory not charted since 2015.

Upbeat analyst attention could also be on the horizon for the pharma concern. Only five analysts currently follow ARWR, and two maintain tepid "hold" ratings, leaving the door wide open for positive initiations or upgrades. Meanwhile, the consensus 12-month price target for the shares sits at just $5.50 -- a significant discount to ARWR's current perch, suggesting price-target hikes are overdue.

Options buyers anticipating more upside for Arrowhead Pharmaceuticals shares in the near term could consider the April 7 call, which was last asked at $1.10. In order to profit on the play, the buyers would need ARWR shares to surmount $8.10 (strike plus premium paid) by the close on Friday, April 20.


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