Bearish Betting Picks Up as Valeant Pharmaceuticals Intl Inc (VRX) Spirals

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is tumbling with its fellow drug stocks, after a scathing outlook from Mizuho Securities

Nov 23, 2016 at 10:52 AM
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Biotech stocks are struggling today, as disappointing drug news sinks sector components Juno Therapeutics Inc (NASDAQ:JUNO) and Eli Lilly and Co (NYSE:LLY). Meanwhile, embattled drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is not only succumbing to the headwinds, but also a scathing outlook from Mizuho Securities. And while VRX stock was last seen down 4.7% at $17 -- widening its year-to-date deficit to 83.% -- options bears are bracing for even more losses over the next several weeks.

Taking a quick step back, Mizuho Securities this morning downgraded VRX stock to "underperform" from "neutral," and slashed its price target to $11 from $25 -- territory not charted since May 2009. The brokerage firm specifically said it thinks Valeant's "risk/reward is unfavorable due to growth challenges, 2017 guidance risk, legal overhangs, and weaker asset divestitures." Additionally, Mizuho said that while there is "no impending sell catalyst, we believe this stock will edge lower over the next 6-12 months as investor patience wanes."

Meanwhile, in the options pits, puts are trading at a slightly faster-than-usual clip, with roughly 13,000 contracts on the tape. One of the most active VRX options pits at last check is the December 16.50 put, where it seems safe to assume new positions are being purchased. In other words, put buyers expect VRX to breach $16.50 by the time the front-month options expire on Friday, Dec. 16 -- or they risk losing 100% of the premium paid.

More broadly speaking, VRX options traders have shown a growing appetite for long calls relative to puts in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 68,438 calls in the past 10 sessions, compared to 27,256 puts. Plus, the resultant call/put volume ratio of 2.51 ranks in the 81st annual percentile.

Echoing this call-skewed backdrop is VRX's Schaeffer's put/call open interest ratio (SOIR) of 0.64. Not only does this show that calls outweigh puts among options expiring in three months or less, but it ranks lower than 96% of all comparable readings taken in the past year. In other words, short-term speculators are more call-heavy than usual toward VRX stock.

Given VRX's long-term technical troubles, though, it's possible that a portion of this call buying -- particularly at out-of-the-money strikes -- is a result of short sellers hedging their bearish bets against any unexpected upside. Short interest on Valeant Pharmaceuticals Intl Inc (NYSE:VRX) rose 8.3% in the two most recent reporting periods, and now accounts for a healthy 10% of the stock's available float.

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