Option Bears Take Note as Citron Rocks Mallinckrodt PLC (MNK)

Citron Research is taking a toll on Mallinckrodt PLC (MNK) this afternoon

by Alex Eppstein

Published on Nov 9, 2015 at 3:25 PM

Mallinckrodt PLC (NYSE:MNK) is getting demolished, after notorious short seller Citron Research took a shot at the drugmaker via Twitter. In addition to comparing it unfavorably to another stock it's recently burnt -- Valeant Pharmaceuticals Intl Inc (NYSE:VRX) -- Citron suggested MNK may be gaming the reimbursement system:
Also weighing on MNK is a trial of its Acthar Gel lupus treatment, which missed its main goal. Collectively, these developments have sent the stock -- which was previously halted -- spiraling 16.5% lower to hover around $58.34, and landing on the short-sale restricted list. In fact, the equity earlier touched an annual low of $52.01. Option traders have responded en masse, with put volume surging to 13 times the expected intraday rate.

Jumping right in, buy-to-open activity is detected at a number of strikes. In the lead is the November 60 put, which traders are purchasing to wager on an extended move south of $60 by next Friday's close, when front-month options expire. Based on the volume-weighted average price (VWAP) of $4.84, these speculators need MNK to breach breakeven at $55.16 (strike less VWAP) by expiration in order to profit. However, if the shares bounce back above $60, the most the buyers risk losing is the initial premium paid.

Historically speaking, today's penchant for long Mallinckrodt PLC (NYSE:MNK) puts over calls is unusual. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has racked up a 10-day call/put volume ratio of 2.12 -- with long calls more than doubling puts. What's more, this ratio ranks in the high 86th percentile of its 12-month range.

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