Put Options Pop as Aerie Pharmaceuticals Inc (AERI) Extends Breakout

Aerie Pharmaceuticals Inc (NASDAQ:AERI) is trading higher on an upbeat analyst note

Sep 14, 2016 at 3:24 PM
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Drugmaker Aerie Pharmaceuticals Inc (NASDAQ:AERI) is soaring 8.1% to $21.24 today, after Raymond James initiated coverage on the stock with a "strong buy" rating and $48 price target -- representing a 126% premium over the shares' current levels, and record-high territory for AERI stock. An analyst at the firm noted, "AERI could emerge as a major player in the ophthalmology space," with today's note coming just a week after Aerie submitted a new glaucoma treatment to the U.S. Food and Drug Administration (FDA) for approval. And while the shares climb the charts, AERI options are taking off.

The stock's total options volume of nearly 5,900 contracts arrives in the 99th percentile of its annual range, and AERI puts have an unusual lead today, with the 3,500 contracts exchanged representing about 10 times the expected intraday volume. Leading the action by a mile is the October 15 put, with more than 1,800 contracts on the tape. It appears traders are purchasing new positions here, and will profit should AERI slide back below the $15 level -- which has not been breached on a daily closing basis in nearly four months -- before the back-month option's expiration, on Friday, Oct. 21. With the popular option so far out of the money, however, it's possible some of today's buyers are actually AERI shareholders, looking to hedge against a near-term plunge

In fact, while puts are dominating the action today, a more bullish options strategy has been prevalent of late. Call buying has been popular in the equity's options, with 2.02 AERI calls purchased for each put over the past 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). And peak open interest currently resides at the out-of-the-money October 30 call.

Speculators are likely paying a hefty price to pick up the stock's short-term options today, however. AERI's 30-day at-the-money implied volatility (IV) popped 22.6% higher to 209% today -- in the 99th percentile of its annual range. That means short-term options premiums are pricing in seriously inflated volatility expectations at the moment.

Elsewhere, every analyst currently following AERI maintains a bullish "strong buy" rating. And the average 12-month price target sits deep in record-high territory, at $46.13. (The stock's reigning all-time high is $35.89, set back in April 2015.) Just last month, Canaccord Genuity backed its own lofty price target of $44 in a research note predicting "a catalyst-heavy second half" for the drug stock -- a forecast options traders seem to share, based on the currently steep IV levels for AERI options.

While the stock may not be the strongest technical performer over the long term, still down nearly 13% year-to-date, Aerie Pharmaceuticals Inc (NASDAQ:AERI) has made steady progress more recently. The shares are currently in the process of establishing support at the round $20 level, which -- prior to a breakout last week -- had previously served as resistance since January.

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