Option Bears Target 2 Sliding Biotech Stocks

Option bears targeted drugmakers Mylan NV (MYL) and TrovaGene Inc (TROV)

Apr 25, 2016 at 4:31 PM
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Biotech stocks were on the move today, with upbeat drug news, FDA-induced buzz, and C-suite shake-ups among a range of catalysts. Two drugmakers in particular -- Mylan NV (NASDAQ:MYL) and TrovaGene Inc (NASDAQ:TROV) -- saw increased bearish action in the options pits.

Generic drug producer MYL shed 6.8% to end at $45.02 today, giving up its month-to-date lead, after sector peer (and former buyout target) Perrigo Company plc Ordinary Shares (NYSE:PRGO) announced a major executive departure  and issued a profit warning. MYL has given up 17% so far this year, spending the last two months battling resistance in the previously supportive $49-to-$50 area. In fact, this region is also home to the equity's declining 10-month moving average -- a trendline the shares have not overcome since last June.

Analysts have been less than impressed with MYL, as six out of 11 rate the stock a lukewarm "hold." And short sellers have been slowly backing off, but their bearish bets still account for nearly 12% of the security's available float. At MYL's average pace of trading, it would take more than two weeks to cover all the shorted shares.

In the options pits, pessimism has been running high. The stock's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits in the 90th percentile of its annual range, at 3.55. Mirroring this trend is MYL's Schaeffer's put/call open interest ratio (SOIR) of 1.43 -- a new annual high. This means short-term traders are more put-skewed now than at any time in the last 12 months.

Today, MYL options crossed the tape at twice the usual rate, with puts in the lead once again. It appears one trader may be betting on a post-earnings dip, initiating a bearish put spread by buying 500 of the weekly 5/6 46-strike puts, while simultaneously selling to open an equal number of weekly 5/6 40-strike puts. This speculator will achieve maximum profit if the shares of Mylan NV (NASDAQ:MYL) settle right at $40 when the options expire next Friday -- which also encompasses the company's earnings release on Tuesday, May 3.

TROV gapped 23.8% lower to $4.73, after the company announced that Bill Welch, former chief executive of Sequenom, Inc. (NASDAQ:SQNM), will take over as CEO -- replacing Antonius Schuh, who was fired last month. The equity is down 12% in 2016, with its 80-week moving average rejecting the shares' advances since early December. And with today's drop landing TROV on the short-sale restricted list, bears took to the options pits, where contracts traded hands at four times the average intraday pace.

Puts nearly tripled calls today, with 1,350 traded. In fact, put volume finished the session in the 99th percentile of its 12-month range. Puts also accounted for the three most active TROV options for the day, with the October 5 put taking the lead. It looks like some of the action there was the buy-to-open variety, meaning at least one trader is betting the shares will stay beneath the $5 level over the next six months.

Now also seems to be a prime time to pick up TROV premium, as the security has a Schaeffer's Volatility Index (SVI) of 70% -- lower than 98% of all readings in the last 52 weeks. That means the stock's near-term options should be attractively priced, from a historical volatility perspective.

Looking more broadly, options traders have been unusually bearish lately, though long calls have still far outpaced puts in recent weeks. At the ISE, CBOE, and PHLX, the equity's 50-day put/call volume ratio of 0.35 is higher than 90% of the past year's readings.

Outside of the options pits, short interest accounts for about 19% of TROV's total float, or more than 10 days' worth of trading, at the stock's average daily volume. But analysts have been kind, with four out of five rating the equity a "strong buy," and not a "sell" opinion in sight. TrovaGene Inc (NASDAQ:TROV) could be in trouble if the brokerage bunch changes its tune.

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