Put Options In Play For This Drug Stock

PBYI options are attractively priced, to boot

by Patrick Martin

Published on Sep 5, 2019 at 11:55 AM

The shares of Puma Biotechnology Inc (NASDAQ:PBYI) are enjoying a mini-rally today, up 3.1% to trade at $10.71 at last check. The drug stock has added 17% in the past month, but this has taken PBYI right up to a historically bearish trendline that could make for an intriguing put option play, if past is precedent. 

Today's gains take the shares right up to resistance at their 70-day moving average, after a lengthy stretch below it. There have been six similar encounters with this moving average in the last three years, after which PBYI stock was lower 21 days later by 18.3%, on average, per data from Schaeffer's Senior Quantitative Analyst Rocky White, with five of the six returns negative.

What's more, implied volatilities on the equity are at low levels. The equity's Schaeffer's Volatility Index (SVI) of 84% registers in the 14th percentile of its annual range, a few notches below its two-year average SVI of 78.4%. With the stock resting on a historically bearish trendline, and short-term options unusually cheap at the moment, White's modeling shows that an at-the-money PBYI put option could potentially return 109% over the next 10 days. In other words, prospective put buyers could more than double their money on an expected 18.3% drop in the shares.

Daily Stock Chart PBYI

Since a early May bear gap on weak Nerlynx sales, Puma Biotechnology stock has carved out a channel of lower lows to the tune of a 47% year-to-date deficit. The sentiment setup is just as bleak; all seven analysts in coverage rate the equity a "hold" or "strong sell," while 26.4% of its total available float is dedicated to short sellers.

Options traders have ramped up their bearish bets lately too. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), PBYI's 10-day put/call volume ratio of 0.61 ranks in the 90th annual percentile. So while calls still outnumber puts on an absolute basis, the high percentile indicates puts have been bought to open relative to calls at a quicker-than-usual clip.

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