Analyst: Merck Stock is a "Low-Risk Value Option"

Options traders have been more bullish than usual of late

Deputy Editor
Sep 14, 2022 at 9:22 AM
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According to a Berenberg bull note, Merck & Co., Inc. (NYSE:MRK) is a solid "low-risk value option" in the pharmaceutical sector. The brokerage firm upgraded MRK to "buy" from "hold," and hiked its price target to $100 from $95, saying the shares could potentially jump 17%, thanks to low exposure to U.S. drug price reform and The Inflation Reduction Act, both of which pose significant threats to the pharmaceutical sector.

Merck stock is relatively unchanged despite the broker's optimism, last seen up just 0.3% to trade at $86.50 before the open. Yesterday's dip was caught by the 160-day moving average, and the $85 level has stepped in as a floor in recent weeks. Coming into today, MRK boasted a 12.6% year-to-date lead.

The brokerage bunch overall is still relatively split on Merck stock. Specifically, ahead of Berenberg's bull note, 10 covering analysts sported a "strong buy" rating, while the remaining eight recommended a tepid "hold." Meanwhile, the stock's 12-month consensus target price of $100.85 is a 16.6% premium to last night's close.

Options traders are approaching with more pessimism. MRK sports a 50-day put/call volume ratio at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) that sits in the 82nd percentile of its annual range. Echoing this, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.83 sits in the 88th percentile of readings from the last 12 months. These elevated readings point toward a preference for bearish bets that's unusually high in the given time period.

Those looking to join these traders are in luck, as premiums are looking affordable right now. The security's Schaeffer's Volatility Index (SVI) of 23% stands higher than just 28% of readings from the past 12 months, suggesting that these players are pricing in low volatility expectations right now. What's more, the stock's Schaeffer's Volatility Scorecard (SVS) stands at 94 out of 100, meaning MRK has tended to outperform these volatility estimates. 

 

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