Mallinckrodt PLC (MNK) Punishes Shorts on Post-Earnings Pop

Mallinckrodt PLC (MNK) is enjoying its fourth consecutive post-earnings rally

Aug 2, 2016 at 11:47 AM
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Drugmaker Mallinckrodt PLC (NYSE:MNK) is booming at midday, up 12% at $75.46, following the company's strong fiscal third-quarter earnings report and upbeat full-year outlook. The stock's rally has MNK's usually quiet options pits buzzing, and elsewhere, short sellers could be sweating the news.

Though short interest fell by 19% during the two most recent reporting periods, these bearish bets still represent 10.6% of MNK's available float. At the stock's average daily pace of trading, it would take almost two weeks to buy back all these shares. That means there is plenty of pent-up buying power ready to send the equity soaring higher, should shorts hit the bricks.

Options traders were showing more optimism than we'd seen recently heading into earnings. Long calls have outstripped puts over the last two weeks, per the stock's 10-day call/put volume ratio of 1.12 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 86th percentile of its 12-month range. Likewise, MNK's Schaeffer's put/call open interest ratio (SOIR) of 0.29 is seated at an annual low, underscoring the call-skew. Of course, some of this may have been driven by short sellers hedging with protective calls. Whatever the case may be, it's also worth noting that volume in MNK's options pits has been quite low, with total open interest close to the bottom quartile of its yearly range, at 38,306 contracts outstanding.

As alluded to, MNK options are crossing at seven times their usual intraday rate today, as traders weigh in on the stock's post-earnings pop. Of course, a positive earnings reaction for the shares shouldn't come as a great surprise, considering the stock has moved higher in the session following earnings for the last three quarters in a row.

On the technical front, MNK has struggled over the past 12 months, giving back 29% of its value, with scathing comments from short seller Citron Research weighing on the shares. But today, Mallinckrodt PLC (NYSE:MNK) is making significant progress, first taking out the round $70 level -- which had limited the stock's upward action since early January -- then bounding above its year-to-date breakeven of $74.63. This puts the shares in positive year-to-date territory for the very first time in 2016.

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