BioMarin Pharmaceutical Inc., TESARO Inc Options Volume Soars on Sector Tailwinds

Biotech stocks BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) and TESARO Inc (NASDAQ:TSRO) options are flying off the shelves after Pfizer Inc.'s (NYSE:PFE) purchase of sector peer Medivation Inc (NASDAQ:MDVN)

by Andrea Kramer

Published on Aug 22, 2016 at 1:51 PM

Biotech stocks BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) and TESARO Inc (NASDAQ:TSRO) are notably higher today, thanks to a halo lift stemming from Pfizer Inc.'s (NYSE:PFE) purchase of Medivation Inc (NASDAQ:MDVN). The news has sparked optimism about the acquisition appeal of several mid-cap biotechs, and BMRN and TSRO call options are flying off the shelves today.

BMRN has surged 6.2% to $97.69, bringing its third-quarter gain to an impressive 25.5% so far. The stock gapped higher in early July, in fact, on speculation that Roche Holding Ltd. was reconsidering a multi-billion-dollar bid for the company.

Further, BMRN trading volume is on pace for the 98th percentile of its annual range. In the options pits, BMRN calls are crossing at three times the average afternoon clip, and have more than tripled puts so far.

It looks like a healthy portion of the action is attributable to buy-to-open volume at the out-of-the-money October 110 call. By purchasing these calls to open, the buyers expect BMRN shares to rally north of $110 -- territory not charted since late 2015 -- by the close on Friday, Oct. 21, when the options expire.

Meanwhile, BMO Capital analyst Do Kim waxed optimistic on the M&A prospects of several companies -- including BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) -- after the MDVN/PFE deal, stating, "We believe these companies could potentially command a higher multiple given the limited number of late-stage clinical and commercial biotechs." Other analysts were already bullishly aligned prior to today, with 13 out of 14 doling out "buy" or better endorsements, and not a "sell" in sight.

TSRO has edged 3.8% higher to $98.64, and just hit a record high of $99.28. The stock's daily volume is on track for the 96th percentile of its annual range. The shares have skyrocketed more than 88.5% in 2016, largely thanks to a mammoth rally in late June, stemming from well-received drug data.

TSRO calls are changing hands at seven times the average afternoon pace, and have more than doubled puts so far. However, some of the September 110 calls -- most active thus far -- may have been sold to open, meaning the traders expect the $110 level to act as a ceiling through the close on Friday, Sept. 16, when front-month options expire.

Prior to today, options traders bought to open more than 2.5 TSRO calls for every put on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) during the past two weeks. Some of those calls may have been purchased as hedges, though, particularly when it comes to out-of-the-money strikes. Short interest on TESARO Inc (NASDAQ:TSRO) jumped 9.7% during the past two reporting periods, and now accounts for 23.5% of the stock's total available float. At the equity's average pace of trading, it would take more than two weeks to buy back these bearish bets.

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