Valeant Pharmaceuticals Intl Inc (VRX) Calls Hot as Papa Swears In

Joseph Papa has officially replaced Michael Pearson as CEO of Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

May 3, 2016 at 2:25 PM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been making headlines on a regular basis these days. Yesterday, for instance, the troubled biotech was at the center of a clash between Wall Street heavyweights Warren Buffett and Bill Ackman. Today, VRX said that Joseph Papa has officially stepped into the role as chairman and CEO -- replacing the embattled Michael Pearson. Against this backdrop, VRX stock has soared 13.2% to $36.95, and short-term options traders are calling for even more upside.

Taking a quick step back, call options are trading at two times what's typically seen at this point in the day -- and are outpacing put options by a 3-to-1 ratio. In fact, all of VRX's 10 most active options are calls, each of which expires within the next three weeks.

Most active are VRX's weekly 5/6 36- and 40-strike calls, as well as the May 37 call, where almost 25,000 contracts have collectively traded. It seems safe to assume new positions are being purchased at this trio of calls, meaning the options buyers expect VRX to settle north of the respective strikes at expiration. The weekly series expires at this Friday's close, while the front-month contracts expire at the close on Friday, May 20.

Today's accelerated call volume only echoes the action seen in VRX's options pits in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day call/put volume ratio of 1.56 ranks higher than 83% of all comparable readings taken in the past year.

What's more, VRX currently sports a front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.84. This means that near-the-money call open interest outweighs put open interest among options residing in the monthly May series. Considering short interest shot to its highest perch in at least 14 years recently, some of this call buying could be a result of short sellers hedging their bearish bets.

On the charts, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has been in a long-term spiral, shedding more than 83% year-over-year. However, today's surge -- which comes even after VRX received a price-target cut to $102 from $105 at Rodman & Renshaw -- has the shares on track to close north of their 40-day moving average for the first time since Jan. 26.

VRX daily chart

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