Bullish Options Traders Strike as Valeant Stock Flashes 'Buy' Signal

Options traders have been buying Valeant Pharmaceuticals Intl Inc (VRX) calls over puts at an extreme rate in recent months

Feb 15, 2017 at 2:25 PM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) call options are trading at double the expected rate for this point in the afternoon. And based on a technical signal that just flashed, it might be the perfect time to place a bullish bet on the drugmaker's shares.

Starting with the stock's options trading data, 50,000 calls are currently on the tape, versus fewer than 20,000 puts. The two most active strikes are the February 16 and 17 calls, where buy-to-open activity is likely taking place. In other words, buyers believe VRX will extend today's gains through week's end, when the front-month series expires. This simply echoes what we've seen over the past 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During that time frame, Valeant has racked up its highest call/put volume ratio of the year, at 2.45.

At last check, VRX stock was 4.5% higher at $16.70, rewarding recent bulls. Moreover, the shares have shown strength since toppling their 50-day moving average last week. Historically speaking, a crossover of that trendline has served as a "buy" signal for stocks in general -- and, so far, that seems to be the case for Valeant. In other words, today's gains could represent just the tip of the proverbial iceberg.

Making it an even better time for options traders to buy VRX calls is the collective negativity being levied toward the shares on Wall Street. Twelve of 14 analysts rate the stock a "hold" or "strong sell," leaving room for upgrades. Not to mention, 35.6 million shares are sold short, suggesting a short-squeeze situation could be in the cards.

Last but not least, near-term volatility expectations are currently modest on Valeant Pharmaceuticals Intl Inc (NYSE:VRX). For one, the stock's Schaeffer's Volatility Index (SVI) of 81% ranks in the low 30th percentile of its annual range, suggesting short-term premium can be purchased on the cheap. For another, VRX's Schaeffer's Volatility Scorecard (SVS) of 75 indicates the stock has tended to make larger moves in the past year than the options market has priced in. 

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