Salix FDA Win Boosts Valeant Stock Before Earnings

Valeant is scheduled to report earnings tomorrow morning

May 7, 2018 at 10:05 AM
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Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are up 2.6% to trade at $18.49, after the Canada-based drugmaker said the Food and Drug Administration (FDA) had approved PLENVU -- a bowel cleanser used to prep patients for colonoscopies -- which is jointly developed by VRX subsidiary Salix Pharmaceuticals and Norgine. While today's move echoes the stock's recent muted price action, Valeant could be in for a volatile session tomorrow after the company reports earnings.

In fact, over the past seven quarters, VRX stock has averaged a single-session post-earnings swing of 16.5% in either direction -- including an 11.4% plunge in the session following February's report, and a 17.1% one-day surge back in November. For tomorrow's trading, the options market is pricing in an 15.5% post-earnings swing, based on implied volatility data.

A move of this magnitude would run counter to VRX's relatively quiet price action of late. The stock's 30-day historical volatility (HV) of 20.6% ranks below 99% of comparable readings taken in the past year, while its 120-day HV of 53.1% arrives in the 5th annual percentile. And while the shares have added 24% since their early April lows, the rebound has stalled out near $18.50 -- home to their late-February pre-bear-gap close and their 100-day moving average.

It looks like one options trader in particular is hoping the stock holds below here after earnings. The May 18 call is home to peak front-month open interest of 27,079 contracts. Trade-Alert indicates the bulk of activity occurred on Thursday, April 19, when a number of contracts were sold to open by one trader rolling out their short April 17 calls.

This call writing strategy has been popular on VRX in the two weeks leading up to earnings. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have sold to open 1.12 calls for each one they've purchased. While this could be indicative of speculators setting a ceiling for the shares, it's also possible they're hoping to profit on a post-earnings volatility crush.


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