Put Players Pile On as Valeant Pharmaceuticals Intl Inc (VRX) Stock Sinks

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is slumping, as negative earnings reactions for Amgen, Inc. (NASDAQ:AMGN) and Novo Nordisk A/S (ADR) (NYSE:NVO) weigh on biotechs

by Karee Venema

Published on Oct 28, 2016 at 2:25 PM

Biotechs are struggling today as negative earnings reactions for Amgen, Inc. (NASDAQ:AMGN) and Novo Nordisk A/S (ADR) (NYSE:NVO) weigh on the sector. While the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) was last seen off 1.5% at $261.40, drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has plunged 7.2% to trade at $20.52. In VRX's options pits, meanwhile, puts are crossing the tape at an accelerated clip, with a number of options bears eyeing additional losses for the drug stock over the next several weeks.

By the numbers, around 40,000 VRX puts have traded so far, almost two times the expected intraday amount of 22,000. While it seems some speculators are closing their weekly 10/28 24-strike puts ahead of tonight's expiration, other traders seem to be purchasing new positions at the November 20 put -- a theory echoed by data from the International Securities Exchange (ISE). In other words, put buyers expect VRX stock to breach the round $20 mark by front-month options expiration at the close on Friday, Nov. 18 -- a time frame that includes Valeant's quarterly earnings report and the U.S. presidential election, which both occur on Tuesday, Nov. 8.

More broadly speaking, it's been call buyers who have been busy in VRX's options pits. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), VRX sports a top-heavy 50-day call/put volume ratio of 2.17. What's more, this ratio ranks just 2 percentage points from a 52-week peak, meaning options traders have been buying to open calls relative to puts at a near-annual-high clip of late.

Echoing this call-skewed backdrop is VRX's Schaeffer's put/call open interest ratio (SOIR) of 0.63. Not only does this show that calls outweigh puts among options expiring in three months or less, but it ranks lower than 98% of all comparable readings taken in the past year. Simply stated, short-term speculators have rarely been as call-skewed toward VRX as they are now.

However, VRX has seen a concurrent rise in short interest of late, indicating that some of the recent call buying could be at the hands of short sellers hedging their bearish bets against any unexpected upside. Specifically, short interest surged 11.2% in the most recent reporting period, and now accounts for a healthy 10.2% of the security's available float.

Looking at the charts shows short sellers have been on the winning side of the VRX trade. Year-to-date, the shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) have shed nearly four-fifths of their value. And while VRX stock is up nearly 11% from its late-June five-year low at $18.55, its 20-day moving average -- currently located at $22.58 -- has served as a stiff ceiling since early September.

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