Soaring Merck & Co., Inc. (MRK) Sets Options Pits on Fire

Merck & Co., Inc. (MRK) hit a new annual high, benefiting from a competitor's disappointing drug news

by Kirra Fedyszyn

Published on Aug 5, 2016 at 11:50 AM

Drugmaker and Dow component Merck & Co., Inc. (NYSE:MRK) is flying high today, leading the blue-chip index higher, as it benefits from a competitor's disappointment. Specifically, Bristol-Myers Squibb Co (NYSE:BMY) has plummeted on the charts after the company announced its lung cancer treatment failed to meet goals in a clinical trial. Meanwhile, shares of MRK are up 6.8% at $61.80 -- and fresh off a new annual high of $62.60 -- as Merck produces rival cancer drug, Keytruda. And while the stock runs higher with volume already hitting a 12-month peak, MRK options are changing hands at breakneck speeds.

Diving right in, MRK's total intraday options volume is running in the 100th percentile of its annual range, with calls trading at a whopping 15 times the average intraday rate. That doesn't mean today's price action has everyone in MRK's bullish corner, however. The most active option so far, by a mile, is the August 57.50 put. While some of this may be of the bearish buy-to-open sort, International Securities Exchange (ISE) data suggests a block of 5,451 contracts was sold to close, suggesting one skeptic has seen enough. Elsewhere, though, clear-cut buy-to-open activity is detected at the October 60 put. Buyers of this option are betting on MRK pulling back below $60 by the close on Friday, Oct. 21.

If bears make up the majority of MRK options traders today, that wouldn't be unusual. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 1.20 shows long puts easily outstripping calls. Moreover, this ratio sits higher than 85% of the past year's readings. A capitulation among these skeptics -- provided they're not shareholders hedging -- could provide tailwinds.

MRK could get a further boost on the charts if analysts begin to raise their opinions. At the moment, two-thirds of the brokerage firms tracking the stock give it a tepid "hold" rating. Plus, the consensus 12-month price target of $62.15 sits a stone's throw away.

The stock has been a strong technical performer this year, even before today's bull gap. The shares have been buoyed by support at their 80-day moving average since March, adding 17% year-to-date. That said, there could still be speed bumps ahead for Merck & Co., Inc. (NYSE:MRK), as the stock has struggled in the $60-$65 region several times over the last two years.

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