Option Bears Amped Up as Citron Levels Mallinckrodt PLC (MNK)

A brutal comparison from Citron Research has driven Mallinckrodt PLC (MNK) to fresh lows

by Alex Eppstein

Published on Mar 16, 2016 at 10:56 AM

Drugmaker Mallinckrodt PLC (NYSE:MNK) plummeted 13.7% yesterday, following Valeant Pharmaceuticals Intl Inc's (NYSE:VRX) sector-led sell-off. It's more of the same this morning, with the shares sliding 7.5% to trade at $55.04 -- extending their stay on the short-sale restricted list -- and bringing option bears out in force. In fact, the stock earlier hit a two-year low of $50.90.

The sell-off was sparked by overnight comments from Citron Research founder Andrew Left, who said MNK's seizure drug Acthar is a "poster child" for price gouging. Left added that Mallinckrodt makes troubled Valeant -- which Citron compared to Enron last year -- look like a "choirboy" by comparison.

In the options pits, puts are changing hands at 13 times the expected intraday rate. The most active strike is the out-of-the-money March 50 put, which is being bought to open, according to Trade-Alert. By purchasing these puts, the traders believe MNK will breach the half-century level (for the first time since December 2013) by this Friday's close, when front-month options expire.

Put buying is nothing new for MNK. During the past 10 days across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has amassed a put/call volume ratio of 4.63 -- with long puts outstripping calls by a nearly 5-to-1 margin. What's more, this reading ranks in the high 87th percentile of its annual range.

Short sellers have grown increasingly skeptical of MNK, too. During the latest reporting period, short interest rose 5.1% to 11.6 million shares -- the highest level since October 2014. At the stock's average daily trading volumes, it would take nearly seven sessions to cover these bets.

About the only pocket of optimism for Mallinckrodt PLC (NYSE:MNK) is among the brokerage crowd. In fact, 92% of covering analysts rate the shares a "buy" or better, with not a single "sell" opinion in sight. However, if MNK continues to spiral lower, a round of downgrades could exacerbate selling pressure and send the stock to lower lows.

Sign up now for Schaeffer's Market Recap to get all the day's big stock movers, must-know technical levels, and top economic stories straight to your inbox.

A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earning announcements before it's too late!



NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories

The Nevada Discovery That Could Jeopardize Chinese Dominance
Click to continue to advertiser's site.
Puts Popular as GM Stock Rallies
GM puts are all the rage lately
JetBlue Stock Surging Despite Sector Skepticism
J.P. Morgan Securities downgraded JBLU to "neutral" from "overweight"
The Nevada Discovery That Could Jeopardize Chinese Dominance
Click to continue to advertiser's site.