Option Bulls Expect Vanda Pharmaceuticals Inc. (VNDA) to Rebound

Vanda Pharmaceuticals Inc. is sagging in the face of lowered guidance

by

Published on Oct 27, 2014 at 10:59 AM
Updated on Apr 20, 2015 at 5:09 PM

Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is down 3% this morning at $10.77, after lowering its guidance -- and despite posting a narrower-than-expected third-quarter loss. In fact, the stock has been down by as much as 14.2% today -- and was placed on the short-sale restricted (SSR) list. Things were quite different last Friday, when the shares rallied 7.6%, prompting traders to flood VNDA's options pits.

Looking more closely at Friday's action, contracts crossed at triple the usual daily rate. Additionally, the equity's 30-day at-the-money implied volatility (IV) spiked 15.6% to 109.3%, signaling elevated demand for short-term strikes.

Most active by a healthy margin was VNDA's November 13 call. Two-thirds of the 1,980 contracts traded did so at the ask price, IV popped, and open interest added 1,461 contracts over the weekend. All things considered, it's safe to assume new bullish bets were initiated at the out-of-the-money strike. Alternatively, it's possible the calls were bought to serve as an upside hedge, as 43.4% of the equity's float is sold short.

In a nutshell, Friday's buyers expect Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) to topple $13 by the close on Friday, Nov. 21, when front-month options expire. However, the stock hasn't explored these levels in more than a month. As such, delta on the call is just 0.24, denoting a slightly less than 1-in-4 chance the option will be in the money at expiration.


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