Goldman Sachs: 'Sell' This Drug Stock

Valeant's near-term options are pricing in extremely low volatility expectations

by Emma Duncan

Published on Jan 24, 2018 at 9:42 AM
Updated on Jan 24, 2018 at 9:57 AM

Shares of drug concern Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are plummeting, after Goldman Sachs initiated coverage on VRX stock with a "sell" rating and a price target of $18 -- a discount of more than 19% to yesterday's close. The brokerage firm cited balance sheet concerns, litigation risks, and competition-related pressure for key products in the near term. In response, VRX was last seen down 5.5% at $21.08 in early trading.

From a broader perspective, Valeant stock recently suffered a losing streak, pulling back from its 14-month high of $24.43 on Jan. 5, due to competition concerns about its diarrhea drug. The shares are now poised for a fifth straight close beneath their 10-day and 20-day moving averages, which helped VRX stock more than double from early November into 2018.

In the options pits, sentiment has been seemingly bullish in recent weeks. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows VRX sporting a 10-day call/put volume ratio of 4.38, ranking in the 88th percentile of its annual range. This suggests calls have been bought over puts at a faster-than-usual clip during the past two weeks.

Digging deeper, now is an opportune time to speculate on Valeant stock with near-term options, which are pricing in extremely low volatility expectations. Its Schaeffer's Volatility Index (SVI) of 49% ranks in just the 9th percentile of its annual range. Plus, VRX's Schaeffer's Volatility Scorecard (SVS) sits at a lofty 100, meaning the stock has made larger moves on the charts in the past year, relative to options traders' expectations.


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