Option Traders Pay Up to Play Valeant Pharmaceuticals Intl Inc (VRX)

Valeant Pharmaceuticals Intl Inc (VRX) option traders are paying up ahead of a critical election and earnings next week

Nov 3, 2016 at 1:45 PM
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It's been a rocky week for beleaguered drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX), with the stock on pace for its lowest weekly close since 2010, and its sixth straight week-over-week loss. The shares were last seen 5.9% lower at $19.87 -- and on the short-sale restricted list -- as traders continue to digest news that the drugmaker is being sued over "female Viagra," marking the latest in a series of stock-moving headlines for Valeant ahead of earnings and a critical election for biotechs next week. What's more, ahead of another week of headlines, traders are paying up for VRX options.

As alluded to above, former Sprout Pharmaceuticals investors say VRX (which bought Sprout last year) failed to meet its obligations to market the female libido pill, and because the company priced Addyi at a steep $800 a month, sales lagged. "Simply put, Addyi is languishing because Valeant's operational ineptitude and breach of its obligations under the merger agreement," went the complaint.

On Monday, it came to light that two of Valeant's former top execs are being investigated for fraud, sending the shares of VRX to a multi-year low of $17.75. However, the company assured investors that it's fully cooperating with the investigation, helping the stock bounce back on Tuesday. Alas, the rebound was only temporary; VRX was back in the red yesterday, amid reports that it's exploring the sale of various units, including Salix and its eye-surgery equipment business.

Looking ahead, next week could be anything but calm for VRX shares. Drugmakers are said to have a key stake in the presidential election on Tuesday, Nov. 7, with Democrat nominee Hillary Clinton recently taking aim at price-gouging pharmaceutical companies. What's more, Valeant is slated to report earnings before the open on Wednesday, Nov. 8, just as traders will likely be digesting the election results.

Ahead of the potential volatility catalysts, it's no surprise that VRX's near-term options are growing relatively expensive. The stock's Schaeffer's Volatility Index (SVI) of 128% sits higher than two-thirds of all other readings from the past year, indicating short-term traders are paying up for VRX options, historically speaking. However, VRX boasts a Schaeffer's Volatility Scorecard (SVS) of 78, indicating the stock has tended to exceed option traders' volatility expectations during the past year. 

Historically, VRX has been known to make major earnings moves. The stock suffered a one-day loss of 51.5% after in March 2016 -- its worst session ever -- only to enjoy a 25.4% post-earnings gain in August. This time around, the options market is pricing in a single-session swing of 21.5%.

During the past 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 2.09 VRX calls for each put -- a ratio ranking just 8 percentage points from an annual high. However, short interest on VRX muscled 16.1% higher during the past two reporting periods, and now accounts for more than 10% of the equity's float, suggesting some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to shorts seeking an options hedge.

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