Endo International plc (ENDP) Calls Heat Up Ahead of Earnings

Call volume is heating up ahead of next week's earnings report from Endo International plc - Ordinary Shares (ENDP)

Nov 4, 2016 at 3:36 PM
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Makers of generic drugs have been under fire, following Thursday's news that the U.S. Justice Department sent out subpoenas to major producers as part of an ongoing antitrust investigation. Among the companies in the spotlight is Endo International plc - Ordinary Shares (NASDAQ:ENDP). Like many of its peers, ENDP stock is trading higher today, up 2.4% at $14.98. And adding to the upward momentum is speculation the company may be planning to sell its Montreal-based Paladin Labs Inc to Canadian drugmaker Knight Therapeutics Inc. The news also has pre-earnings call action heating up in ENDP's options pits.

Typically, options volume on ENDP runs light on an absolute basis. However the stock's calls are trading at triple the expected intraday rate today, with roughly 5,800 contracts on the tape. Among the strikes seeing heavy action is the November 15 call, where some traders appearing to be purchasing new positions. Buyers of the call are expecting ENDP to extend its rally beyond the strike through the front-month expiration, at the close on Friday, Nov. 18.

To do so, however, the stock will have to make it past its quarterly earnings report with no major hiccups -- and that could be a tall order. Endo International is due to reveal third-quarter earnings ahead of the opening bell on Tuesday, and history suggests some serious volatility could be ahead. Over the past eight quarters, ENDP has made a move to the downside four times in the session subsequent to its earnings report. Moreover, the last three consecutive quarters have resulted in massive single-day post-earnings moves, of 21.8%, -39.2%, and -21%, respectively.

Taking a step back, a preference for calls over puts is nothing new in ENDP's options pits. Amid relatively low volume, the stock has accumulated a 10-day call/put volume ratio of 10.23 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- higher than 79% of comparable readings taken in the last year.

These recent call buyers may be banking on a post-earnings bounce for ENDP. History aside, the stock's current 14-day Relative Strength Index (RSI) of 27 -- even with today's pop factored in -- falls in "oversold" territory. That suggests the shares may be due for an even bigger short-term run higher.

From a technical perspective, however, there's not much in ENDP's favor at the moment. The stock has surrendered roughly three-quarters of its value in 2016, and remains the greatest underperformer year-to-date of all S&P 500 Index (SPX) components. The equity was also rejected recently by its 32-week moving average -- a trendline it hasn't topped on a closing basis since July 2015. If that's not enough, Endo International plc - Ordinary Shares (NASDAQ:ENDP) has dropped a painful 30% over the past eight sessions alone.

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