Bear Buys Cheap Teva Pharmaceutical Options After FDA Win

One TEVA shareholder may be protecting paper profits with options

Aug 16, 2018 at 2:59 PM
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    The shares of Teva Pharmaceutical Industries Ltd (NYSE:TEVA) are surging, after the U.S. Food and Drug Administration (FDA) approved the drugmaker's generic versions of EpiPen and EpiPen Jr. -- Mylan's (MYL) emergency allergy treatment. TEVA stock was last seen up 6.4% at $23.94, on track for its best day since Feb. 15.

    This is just more of the same for the stock, which jumped 1.6% yesterday on news Warren Buffett's Berkshire Hathaway (BRK.A) boosted its stake in Teva Pharmaceutical last quarter. The shares are now within a chip-shot of their June 29 annual high of $25.14, thanks to another sharp bounce off their 80-day moving average.

    teva stock daily chart aug 16

    One options trader today doesn't seem convinced TEVA can sustain this positive price action over the next several weeks. The top options trade so far today is an 8,999-contract block of September 22 puts that Trade-Alert indicates was bought to open above the ask price for $0.55 apiece. Accounting for 100 shares per contract, this equates to an initial cash outlay of $494,945.

    This is the most the trader stands to lose, should TEVA settle north of the strike at the close on Friday, Sept. 21. Profit, meanwhile, will begin to accumulate on a move south of breakeven at $21.45 (strike less premium paid). Given the stock's longer-term gains, it's possible this out-of-the-money put buyer could be a shareholder hedging against any downside risk.

    Whatever the reason, it's an attractive time to purchase premium on TEVA. The stock's 30-day at-the-money implied volatility of 7.9% ranks in the 11th annual percentile, meaning short-term options are pricing in relatively low volatility expectations at the moment.

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