Valeant Stock Surge Stalls After High-Profile Downgrade

VRX options bulls have been active amid the stock's recent rally

Managing Editor
Dec 14, 2017 at 9:52 AM
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This morning, biotech stock Valeant Pharmaceuticals International, Inc. (NYSE:VRX) was downgraded to "underweight" from "neutral" at J.P. Morgan Securities, although the brokerage firm issued a price-target hike to $12 from $10. Analysts cited Valeant's patent erosions and lofty earnings estimates over the next two fiscal years, as well as skepticism for specialty pharma in 2018 as reasons for the downgrade.

Out of the gate today, VRX stock is down 4.5% at $21.05. This marks a change of pace to the security's recent trajectory, with Valeant up 101% from its early November lows and fresh off yesterday's an annual high of $22.81. However, the equity's 14-day Relative Strength Index (RSI) closed last night at 84, firmly in "overbought" territory, suggesting a short-term breather may have been in the cards.

Options buyers have preferred calls over puts at an unusual clip amid the stock's uptrend. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), VRX's 10-day call/put volume ratio of 3.42 ranks in the 77th percentile of its annual range.

Those currently targeting the stock's short-term options are in luck. For starters, VRX's Schaeffer's Volatility Index (SVI) of 54% ranks in the 19th annual percentile, meaning low volatility expectations are being priced into short-term options. Plus, the equity's Schaeffer's Volatility Scorecard (SVS) of 90 suggests the drug concern has consistently rewarded premium buyers over the past year by making bigger-than-expected moves on the charts.

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