Valeant Pharmaceuticals Intl Inc (VRX) Options Traders Set a Short-Term Top

Open interest on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) options is at an annual high, while the stock has dropped to a five-year low

May 12, 2016 at 3:43 PM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is trading 5% lower at $25.03 -- and hit a five-year low of $23.55 earlier -- amid an onslaught of headlines. Specifically, Bill Ackman sent a letter to Pershing Square Capital Management shareholders, saying, "There is much work to do at Valeant, which, among other issues, includes ... the potential sale of non-core assets." Additionally, Pershing Square announced it has dismissed Bill Doyle -- a key figure in the hedge fund's VRX investment. Elsewhere, The New York Times is reporting that Valeant has yet to give price breaks on drugs to several hospitals, as promised. But while VRX stock is hurting -- and is on the short-sale restricted list -- action in the stock's options pits is heating up yet again.

By the numbers, VRX options are changing hands at about 1.5 times their average intraday rate, with nearly 167,000 contracts on the tape so far. In fact, options on the security have been especially popular of late -- and open interest is now perched at an annual high.

Drilling down, options traders have had an unusually heavy appetite for calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), long calls have nearly doubled puts over the past 10 sessions, with the resulting call/put volume ratio of 1.96 higher than 74% of the past year's readings.

While calls are outpacing puts again today, not all of the action is of the traditional bullish variety. In fact, the most active VRX call is the June 30 strike, where it looks like much of the action is of the sell-to-open variety. That means call writers are betting that the equity won't overtake the $30 level before June 17, when the back-month option expires.

It looks like now is a prime time to sell premium on VRX's short-term options. The stock's 30-day at-the-money implied volatility has surged nearly 9% to 122.3%, and now sits in the 94th percentile of its annual range. In other words, premium on the stock's near-term is pricing in elevated volatility expectations.

Outside of the options pits, short sellers have been backing off, with these bearish bets dropping by more than 23% during the most recent two-week reporting period, to account for just over 5% of VRX's available float. But analysts have shown no signs of shifting from their pessimistic standpoints. And that's little surprise, as Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has shed nearly 89% of its value over the past 12 months.

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