Options Traders Jump on Battered Sarepta Therapeutics Inc (SRPT)

Option volume has spiked on SRPT as the shares drop hard on disappointing FDA news

Jan 15, 2016 at 2:32 PM
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Biotech issue Sarepta Therapeutics Inc (NASDAQ:SRPT) has dropped more than half of its value today -- and came dangerously close to an annual low earlier -- after documents from the U.S. Food and Drug Administration (FDA) suggested the agency may not approve SRPT's new drug for a muscular wasting disease. This news comes just one day after the FDA's rejection of a rival drug from BioMarin Pharmaceutical Inc. (NASDAQ:BMRN).

SRPT soared in October after a mid-stage study of the same drug showed promising results, and finished 2015 on a staggering yearly gain of 167%. But the stock is off 62.6% so far this year, last seen down 54.4% at $14.43.

There is plenty of room left for the shares to fall, should analysts turn bearish. SRPT currently boasts eight "buy" or better ratings, compared to just four "holds," and not a "sell" in sight. What's more, the 12-month consensus price target on the stock is $44 -- a level not seen since October 2013.

Traders are pessimistic, though. Short interest on SRPT now accounts for more than 26% of its total available float. That accumulation of shorted shares represents more than 10 times the stock's average daily trading volume.

And option traders will be cheering today's drop, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.69 is higher than 89% of all readings in the past year.

Today's heavy losses have landed SRPT on the short-sale restricted list, sending bears rushing to the option pits. Options are crossing the tape at 12 times their typical intraday pace, with roughly 17,000 calls and 10,000 puts traded so far.

It look like some buy-to-open action is happening at the March 20 call, as well as the weekly 1/29 20-strike call. That means traders are betting the security will bounce back above the $20 level by the time the options expire. These contracts aren't going cheap, though. Sarepta Therapeutics Inc (NASDAQ:SRPT) has a Schaeffer's Volatility Index (SVI) of 222% -- in the very top percentile of its annual range. In other words, short-term options are pricing in some of the highest volatility expectations of the past year.


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