The FDA is expected to release its decision on Cempra Inc's (CEMP) pneumonia drug anytime now
Cempra Inc (NASDAQ:CEMP) is trading down 2% at $5.78 -- widening its fourth-quarter deficit to 76% -- as the biotech awaits a Food and Drug Administration (FDA) decision on its community-acquired bacterial pneumonia drug, solithromycin. While SunTrust Robinson recently expressed doubt that the FDA would approve the treatment, and
slashed its rating in the process, options traders appear to be betting on a post-ruling breakout. However, considering CEMP stock is heavily shorted, some of the recent call buying could be of the hedging kind.
Diving right in, speculative traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 4.94 calls for every put in the past two weeks. This ratio ranks in the 63rd annual percentile, meaning calls have been bought to open over puts at a faster-than-usual pace.
Drilling down, CEMP's January 2017 10- and 12.50-strike calls have seen the largest rises in open interest over this time frame, with a collective 4,651 contracts added. According to the major options exchanges, a healthy portion of this activity is a result of traders purchasing new positions, too. In other words, call buyers expect CEMP to surge north of the strikes by the close on Friday, Jan. 20 -- when the front-month options expire.
However, the last time CEMP stock explored double-digit territory was in early November -- as it was selling off after
the FDA waved red flags for solithromycin. And with nearly 14% of the security's float sold short, or 4.8 times the average daily pace of trading, it's possible some of the activity at these deep out-of-the-money call strikes is a result of shorts hedging their bearish bets against any upside risk.
Regardless, with uncertainty swirling around the FDA's decision, now appears to be a pricey time to purchase premium on CEMP. While the stock's Schaeffer's Volatility Index (SVI) of 211% ranks in the 63rd annual percentile, its 30-day at-the-money implied volatility of 198.5% sits just 2 percentage points from a 52-week peak. In other words, elevated volatility expectations are being priced into Cempra Inc's (NASDAQ:CEMP) near-term options.
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