Sarepta Therapeutics Inc (SRPT) Option Bears Eye a Huge Drop Ahead

Put buyers are targeting deep out-of-the-money strikes on Sarepta Therapeutics Inc (SRPT)

by Kirra Fedyszyn

Published on Aug 9, 2016 at 3:30 PM
Updated on Aug 9, 2016 at 3:39 PM

Drugmaker Sarepta Therapeutics Inc (NASDAQ:SRPT) has had an up-and-down year so far. With an impending decision from the Food and Drug Administration (FDA) regarding the company's Duchenne muscular dystrophy (DMD) treatment still hanging over its head, the stock has managed to more than triple from its late-April three-year low of $8, but still sits on a 31% year-to-date loss at $26.60. Options traders seem to be upping the bearish ante today, placing some extremely pessimistic bets.

Puts are trading at roughly 1.3 times the expected intraday rate in SRPT's options pits today, with put volume on track to finish in the 97th percentile of its annual range, and put open interest already seated in the 95th annual percentile. In fact, puts are outpacing calls by a more than 5-to-1 margin.

Most notable, though, is that the most popular options today are deep out-of-the-money strikes. Specifically, the August 9 and 10 puts, and the weekly 8/12 10-strike put, account for the top three positions, with likely buy-to-open action transpiring at each. Buyers of the August puts are looking for SRPT to surrender well over half of its value by front-month expiration at the close on Friday, Aug. 19, while potential buyers of the weekly put are counting on a similar drop by week's end. Alternatively, put buyers may be hedging against these sharp short-term losses. Also intriguing, the 10 strike is already home to heavy put open interest in both the 8/12 and August series, with a mix of buy- and sell-to-open activity taking place at each.

At the moment, it looks like an exceptionally bad time to be buying SRPT's near-term options. The stock currently holds a 30-day at-the-money implied volatility of 269% -- in the 83 annual percentile -- suggesting premium on the stock's short-term options is pricing in unusually high volatility expectations. Meanwhile, SRPT's Schaeffer's Volatility Scorecard (SVS) of 8 indicates the market has overpriced the stock's ability to make outsized moves over the past year.

Overall, bearish sentiment toward SRPT has been running near extreme levels for some time. At 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 2.60 sits just 4 percentage points from an annual peak.

Traders outside of the options pits have also been betting heavily against the stock, with nearly half of SRPT's available float still wrapped up in short interest. And the majority of analyst tracking the security have issued a "hold" or worse recommendation, with its average 12-month price target of $22.46 sitting below current levels.

While the FDA has yet to set a firm date for its decision on SRPT's DMD treatment, at least two brokerage firms have recently noted they expect one in the near-term -- with one analyst saying he thinks accelerated approval remains a possibility. However, it appears the majority of options traders are betting against approval -- and a subsequent drop in Sarepta Therapeutics Inc (NASDAQ:SRPT) shares.

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