Cempra Inc's (CEMP) Worst Day Ever Brings Out Option Bears

An FDA drug warning has Cempra Inc (CEMP) flirting with multi-year lows

Nov 2, 2016 at 11:34 AM
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It's the worst day ever for Cempra Inc (NASDAQ:CEMP). The drug stock is down 48.8% at $9.55, on the short-sale restricted list, and earlier touched a two-year-low of $9.26, after the U.S. Food and Drug Administration (FDA) red-flagged the company's pneumonia drug, citing a "significant safety signal for hepatotoxicity." Amid a turbulent and heavy-volume session, options activity has spiked on CEMP.

At last check, total intraday options volume was running at nine times the usual rate, and poised to touch an annual high by session's end. What's more, CEMP's 30-day at-the-money implied volatility has jumped to 196.9%, also a 12-month peak.

Digging deeper, opening activity is detected at the now out-of-the-money November 12.50 call. With 86% going off at the bid, it seems safe to assume sellers are in the driver's seat, banking on CEMP staying below $12.50 through front-month expiration, at the close on Friday, Nov. 18.

This is more of the same for the stock, according to data from the major options exchanges. Specifically, during the past 10 sessions, traders have sold to open 5,266 CEMP calls, outweighing the 4,513 contracts that were bought to open.

Overall, however, puts have been the options of choice in recent weeks, likely exacerbated by a post-earnings plunge late last month. The stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 1.03 -- in the top quartile of its annual range. What's more, Cempra's Schaeffer's put/call open interest ratio (SOIR) of 0.83 sits just 4 percentage points from a 52-week peak, hinting at relatively put-skewed short-term open interest levels.

These bearish options bettors are joined by plenty of short sellers. Specifically, 18.3% of Cempra Inc's (NASDAQ:CEMP) float is dedicated to short interest, the highest level since early April. What's more, it would take nearly two weeks to buy back these positions, based on the stock's average daily trading volume.

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