Option Bears Bombard Cempra Inc (CEMP) Amid Earnings Selloff

Cempra Inc (CEMP) is getting killed by a poorly received earnings report and a round of bearish analyst notes

by Alex Eppstein

Published on Oct 28, 2016 at 11:27 AM

Pharmaceutical firm Cempra Inc (NASDAQ:CEMP) is taking it on the chin today, and options traders are apparently expecting even more downside to come. At last check, the stock had plunged 17.2% to hover near $19.40, putting it on the short-sale restricted list. Pressuring the shares has been a negative reaction to last night's earnings report, as four analysts have slashed their price targets -- with the deepest cut courtesy of Raymond James, to $27 from $32.

As alluded to, CEMP's options pits are in overdrive today, especially on the put side of the aisle -- where contracts are running at seven times the usual intraday pace, with 2,064 puts on the tape. The most active strike is the out-of-the-money November 15 put, and the International Securities Exchange (ISE) confirms a chunk of these contracts have been bought to open. By purchasing the puts, traders anticipate CEMP will sink below $15 -- into levels not explored since May -- by November expiration.

Today's trend toward puts echoes longer-term data. Specifically, traders have been buying to open puts over calls at an accelerated clip at the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), relatively speaking. The stock's 10-day put/call volume ratio of 0.70 ranks in the 69th percentile of its annual range.

CEMP's Schaeffer's put/call open interest ratio (SOIR) of 0.74 underscores this put bias. While the SOIR is call-heavy from an absolute perspective, it ranks just 7 percentage points shy of a 12-month peak -- meaning the appetite toward puts in the front three-months' series has rarely been greater.

If that's not enough downbeat sentiment, short interest on CEMP has reached levels not seen in about six months. After rising 4.4% in the most recent reporting period, short interest now comprises over 18% of the stock's float. Based on CEMP's daily average trading volume, short sellers would need about two weeks to cover all their bearish bets.

It's hard to blame traders for being skeptical toward the shares. Cempra Inc (NASDAQ:CEMP) has plummeted nearly 38% on a year-to-date basis. Plus, if the stock maintains its current level through the close, it will represent the shares' lowest weekly closing price since late July.

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