Keytruda Optimism Earns Merck Stock a High-Profile Upgrade

MRK shares are now facing off with a key round-number level

Apr 23, 2018 at 10:08 AM
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A number of Dow stocks are getting upgraded this morning, including Merck & Co., Inc. (NYSE:MRK). Specifically, Goldman Sachs lifted its rating on MRK to "buy" from "neutral," and added the pharmaceutical name to its "Americas Conviction List." The brokerage firm waxed optimistic about Merck's lung cancer drug Keytruda, saying the success of the treatment could drive MRK shares up to $73 -- versus its previous price target of $63 -- a 24% premium to Friday's close at $58.83.

In reaction, MRK has jumped 2.6% to trade at $60.33 -- a round level that corresponds with a late-October bear gap, and has served as a ceiling since the stock market correction earlier this year. However, the equity's trend has been higher since bottoming at a nearly two-year low of $52.83 at the start of April.

Options traders have been betting on more upside, too, ahead of Merck's May 1 earnings report. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.41 ranks in the 71st annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

Diving deeper, the May 60 call has seen the biggest increase in open interest over this two-week time frame, with 12,085 positions added. Data from the major options exchanges confirms mostly buy-to-open activity here, pointing to expectations for a round-number breakout by front-month options expiration at the close on Friday, May 18.

Amid Merck stock's recent price action, these bullish options are getting pricey. MRK's 30-day implied volatility skew of 9.8% ranks in the 30th annual percentile, indicating puts are pricing in lower volatility expectations than their call counterparts.

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