2 Surging Biotechs Attract Option Bulls Ahead of FDA Decision

Sarepta Therapeutics Inc (NASDAQ:SRPT) and PTC Therapeutics, Inc. (NASDAQ:PTCT) are climbing the charts ahead of next week's deadline for a big FDA decision

May 20, 2016 at 3:28 PM
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Traders are awaiting news on the U.S. Food and Drug Administration's (FDA) final decision regarding Sarepta Therapeutics Inc's (NASDAQ:SRPT) Duchenne muscular dystrophy drug, with the May 26 deadline looming. And while the shares of SRPT are climbing ahead of the decision, sector peer PTC Therapeutics, Inc. (NASDAQ:PTCT) -- which makes a similar drug available in Europe, but has failed to secure U.S. approval -- appears to be getting a significant halo lift. And with both stocks taking out previous levels of resistance on the charts, traders are making some bullish moves in the options pits.

SRPT is 8.2% higher at $19.04 ahead of next week's expected FDA decision. The shares have found a recent ally in their 80-day moving average and are on track to close above their 100-day moving average for the first time since mid-January. The stock has surrendered more than half of its value so far in 2016, taking a wild ride on the charts as traders have embarked on an FDA-fueled roller coaster ride.

And it looks like at least one options trader is betting on a positive FDA ruling and a big jump for the shares, buying to open a block of 1,500 June 35 calls. This call buyer will profit if the shares can rise above $37.75 (strike + $2.75 premium paid) by the soon-to-be front-month option's expiration, on June 17 -- a move that would require SRPT to roughly double in value. Still, should the shares fail to topple the strike, the most the buyer stands to lose is the initial cash outlay of $412,500 (number of contracts * $2.75 premium paid * 100 shares per contract).

This big bullish bet is a change from the norm in SRPT's options pits of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.03 sits in the 94th percentile of its annual range.

Bearish sentiment runs high outside of the options arena, as well. Out of 12 analysts providing coverage, 10 rate SRPT a "hold" or worse. And short interest has been on the rise, accounting for a whopping 47% of the security's available float. As such, perhaps today's deep out-of-the-money call buyer is a short seller looking for some short-term protection. 

Meanwhile, PTCT is rewarding recent option bulls today, surging 18.3% to $7.78, and looking to finish the session above its 60-day moving average for the first time since its February FDA-induced bear gap. Still, the shares are off 85% year-over-year, and 60% of analysts rate the stock a lukewarm "hold."

But options traders have been turning up the bullish bets lately. PTCT's 10-day ISE/CBOE/PHLX call/put volume ratio sits higher than 94% of the past year's readings, at 66.67 -- though absolute volume tends to be light. And one explanation for this hefty preference for long calls could well lie outside of the options. Short interest on PTCT represents nearly 24% of the equity's available float, suggesting some short sellers may be picking up protective calls to hedge their bearish positions against upside risk.

Today, though, options are crossing the tape at four times their typical intraday rate, with calls just about doubling puts. While much of the action stems from traders closing out their positions ahead of May options expiration tonight, it looks like at least one trader might be betting on a bounce, with possible buy-to-open activity spotting on PTCT's June 9 call.

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