Option Traders Pay to Play These 3 Biotech Stocks

Biotech stocks had an especially rough start to 2016, with many still deep in the red on a year-to-date basis. And as the sector attempts to rally its way back, the options market is pricing in some especially hefty volatility expectations for Eagle Pharmaceuticals Inc (NASDAQ:EGRX), TESARO Inc (NASDAQ:TSRO), and Sarepta Therapeutics Inc (NASDAQ:SRPT), meaning near-term options on these equities are relatively expensive at the moment.

• EGRX is down 8.4% at $33.33 today, after hitting a new annual low of $33.02 earlier in the session. The stock has shed more than 62% year-to-date, due in part to poor fourth-quarter earnings and a string of bad news from the U.S. Food and Drug Administration (FDA). Short interest on EGRX has fallen by nearly 11% during the past two reporting periods, but still accounts for almost half of the stock's total float. At EGRX's typical daily volume, it would take about a week to buy back all the shorted shares. Option volume on the equity is generally light, on an absolute basis, but open interest is at an annual high. Buyers of EGRX's near-term options aren't getting their positions cheap, however. The stock's Schaeffer's Volatility Index (SVI) of 121% is currently at an annual high, as is its 30-day at-the-money (ATM) implied volatility (IV) of 120.6%.

• TSRO started the year with a massive drop, hitting an annual low of $29.51 in early February. The shares have since been on the mend with support from their 30-day moving average, but are struggling to break decisively north of their 200-day moving average, which rejected rally attempts in December. Today, TSRO is up 1.4% at $45.19, but remains 13.8% lower year-to-date. All seven of the analysts providing coverage now call the stock a "strong buy." Still, short interest accounts for nearly 28% of the TSRO's available float, or more than two weeks' worth of trading, at the equity's average daily pace. Option volume is light, on an absolute basis, but the stock's SVI of 103% is still in the top percentile of its annual range, meaning TSRO's short-term option traders are pricing in historically high volatility expectations at the moment.

• SRPT is off 42% so far this year, due mostly to a huge bear gap on discouraging drug news in mid-January. The shares have been recovering over the past two months, and are currently on pace to finish the week above their 20-week moving average for the first time since early January. Traders may be holding on to hope for good news, as the FDA is due to review SRPT's muscular dystrophy drug next month -- and Oppenheimer expects good things. Still, seven out of 12 analysts maintain "hold" or "strong sell" ratings on the security, and short interest has been on the rise. Specifically, these bearish bets increased by nearly 23% during the last two-week reporting period alone, and now represent 43% of SRPT's float, or six times the stock's average daily volume.
  
  SRPT option traders have been more put-heavy than usual, with SRPT's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) higher than 86% of the past year's readings, at 0.55. Put open interest is also currently at an annual high. Meanwhile, SRTP's near-term options reflect historically elevated volatility expectations, as the stock's SVI of 233% is in the 89th percentile of its annual range, while its 30-day ATM IV of 252.5% is in the 98th annual percentile. SRPT is down 0.9% at $22.27 today.

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