Last-Minute Call Buyers Target Valeant Pharmaceuticals Intl Inc (VRX)

Eleventh-hour options traders are targeting Valeant Pharmaceuticals Intl Inc's (NYSE:VRX) weekly 5/27 series as the stock pops

May 27, 2016 at 2:51 PM
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Drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is surging 7.8% to $29.04 today, after reports surfaced that the company rejected a joint takeover bid from Takeda Pharmaceutical Co Ltd and TPG Capital Management LP just weeks before Joseph Papa took over as CEO -- "highlighting the underlying value of Valeant's assets despite recent controversies," opined a J.P. Morgan Securities analyst. The bid was apparently at a substantial premium to the shares' value at the time, but Mizuho Securities speculates that large shareholders would not want to part with their stock while still so far "underwater." While today's jump does little to erase VRX's dismal technical performance over the past 10 months, a batch of last-minute options traders have popped up, looking to get a piece of the action.

VRX options are trading at about 1.3 times their average intraday rate, with calls nearly doubling puts. In fact, call volume is on pace to finish the day in the 95th percentile of its annual range, with the intraday put/call volume ratio of 0.52 sits lower than 88% of the past year's worth of readings.

Drilling down, it appears a large portion of today's action is taking place in the weekly 5/27 series, which expires at the close tonight. Specifically, six of the 10 most active options thus far belong to the weekly series, suggesting a busy round of eleventh-hour betting. Most active are the 29- and 30-strike calls, where buyers appear to be betting on VRX continuing its climb through the end of the session.

Stepping back, a preference for VRX calls has been the norm in recent weeks. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 2.66 is parked in the 85th percentile of its 12-month range. Likewise, the equity sports a Schaeffer's put/call open interest ratio (SOIR) of 0.98 -- lower than 83% of the past year's readings -- meaning near-term traders are unusually call-skewed toward VRX.

But outside of the options pits, things don't look so rosy. Short interest on the stock recently reversed course, rising by more than 44% during the last two-week reporting period. These bearish bets now represent almost 8% of VRX's total float. Plus, 69% of the analysts following VRX maintain a "hold" or "strong sell" rating.

On the technical front, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has given back 88% of its value over the past year, sinking from a record high in August to a five-year low earlier this month. And the shares haven't made much progress lately, as their 40-day moving average has been imposing tough resistance since January.

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