Should Bulls Reconsider Valeant Pharmaceuticals Intl Inc (VRX)?

Valeant Pharmaceuticals Intl Inc (VRX) is failing to live up to the bullish expectations of option traders and analysts

Feb 22, 2016 at 12:14 PM
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Drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has a long history of making outsized moves; the shares soared to an all-time high of $263.81 back in August, only to drop over 70% in less than four months. Today, the stock is extending its analyst-induced slide from Friday -- giving back another 7.2% at $78.87, and maintaining its spot on the short-sale restricted list (SSR). To make matters worse, the stock could experience additional headwinds if some of the optimism among option traders begins to unravel.

Drilling down, there's been a predominant interest in calls over puts over the past 10 weeks. VRX's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 1.72. Not only does this tell us that almost two calls have been bought to open for every put, but this reading lands in the 89th percentile of its annual range, meaning this is an unusual bullish skew.

Further illustrating this point is the open interest breakdown on VRX. Calls account for seven of the pharmaceutical stock's 10 top open interest positions. Also, VRX's Schaeffer's put/call open interest ratio (SOIR) comes in at 0.85 -- an annual low. To put it simply, short-term speculators are more call-skewed than they've been at any other point over the past 12 months. 

Even with the stock's gap lower, call players aren't going anywhere. In today's trading, calls are crossing at roughly twice the average clip, and traders may be opening bullish positions at the March 130 call. If this is the case, it means they expect VRX to gain over 64% to topple $130 by the close on Friday, March 18, when the front-month options expire.

As mentioned, however, the shares are prone to making unexpectedly large moves, proven by their Schaeffer's Volatility Scorecard (SVS). This reading of 93 points to VRX's tendency to make much larger-than-expected moves during the past year, compared to what the options market prices in. Additionally, the firm is tentatively slated to unveil its quarterly earnings report this week, meaning it could see a big post-earnings swing.

Options traders aren't alone in their optimism, though, as analysts' outlooks remain extremely bullish. For one, nine of the 14 brokerage firms that cover Valeant Pharmaceuticals Intl Inc (NYSE:VRX) say it's a "strong buy," and zero deem it a "sell." Moreover, the stock's average 12-month price target of $156.36 stands at almost double current levels. 

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