Call Options Stay Hot on Troubled Valeant Pharmaceuticals Intl Inc (VRX)

Traders' appetite for call options has ramped up as Valeant Pharmaceuticals Intl Inc (VRX) continues its slide

by Kirra Fedyszyn

Published on Mar 17, 2016 at 12:15 PM

After dropping more than half of their value on Tuesday -- and dealing a huge blow to Bill Ackman's Pershing Square -- shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are down another 10.7% at $29.95 today, on news that the company's creditors are demanding new terms as VRX risks defaulting on its debt payments. But with the stock fresh off a new five-year low of $29.88, options traders seem to be working up an increased appetite for calls.

VRX options are trading at twice their typical intraday volume, with about 62,000 calls and 52,000 puts exchanged so far. The deep out-of-the-money January 2017 50 call has seen the most action today, with over 12,000 contracts crossing the tape -- and data from the International Securities Exchange (ISE) suggests at least some of these calls were bought to close.

In the soon-to-expire March series, peak call open interest for VRX sits at the far out-of-the-money 90 call, with over 19,100 contracts outstanding, followed closely by the 18,500-plus contracts at the 40 call. Looking to the back-month series, the April 40 call has seen nearly 10,000 contracts added over the past 10 sessions -- suggesting quite a few traders were eyeing the now far-overhead $40 level for VRX in recent weeks.

In fact, a penchant for calls has been building even as the stock has sold off sharply this week, with VRX's 10-day call/put volume ratio on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) rising to 1.56 from Monday's perch at 1.19. The current ratio ranks in the bullishly skewed 72nd annual percentile, confirming a faster-than-usual clip of call buying relative to put buying. And given that VRX has spent most of the week on the short-sale restricted list, it seems relatively unlikely that we can attribute this influx of call buying to hedging activity by a new batch of shorts.

It's possible that recent call buyers think the shares are due to bounce back -- after all, VRX has a 14-day Relative Strength Index (RSI) of 23, which is well into oversold territory. But Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been on a long-term downtrend, giving up nearly 89% since hitting an all-time high of $263.81 in early August. But given this week's onslaught of dire fundamental developments, the chances of a meaningful technical turnaround in the near future don't look great.

160317VRX

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