2 Biotechs Ready to Rocket

Biotechs Array Biopharma Inc (ARRY) and Ionis Pharmaceuticals Inc (IONS) could be getting ready to make big moves higher

Celeste Taylor
Feb 23, 2017 at 4:26 PM
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While these three biotech ETFs may be getting ready to cool off, two drugmakers just set off bullish signals: Array Biopharma Inc (NASDAQ:ARRY) and Ionis Pharmaceuticals Inc (NASDAQ:IONS). If past is prologue, the stocks' recent trendline tests could mean more upside ahead for the shares.

Array Aims for New Highs

ARRY is currently testing its 40-day moving average. After four other such tests, the stock has averaged a one-month gain of nearly 27%, according to Schaeffer's Senior Quantitative Analyst Rocky White. Most recently, ARRY tested the support of this trendline in early November, and subsequently enjoyed a 61% rally over the following month. Year-over-year, ARRY has tacked on nearly 300%, and last week notched a new nine-year high. However, today ARRY fell 3.5% to $10.36.

170223ARRY

Amid light absolute volume, bearish options players have been setting their sights on ARRY. 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) sits higher than 89% of all other readings from the past year. Given ARRY's technical strength, however, a sudden exodus of these bearish bettors could serve to fuel the shares higher.

Options are attractively priced across the board right now, and Array Biopharma Inc (NASDAQ:ARRY) is no exception. The equity sports a Schaeffer's Volatility Index (SVI) of 65%, which is just 7 percentage points from an annual low. For options traders, this means now is a good time to purchase premium on the shares, with relatively minimal volatility expectations being priced in.

Ionis Bears Active Ahead of Earnings

Meanwhile, IONS is currently testing its 80-day moving average. IONS shares have been higher 75% of the time one month after testing this trendline, with the past four signals generating an average one-month return of 3.9%, though the stock tends to suffer a subsequent one-week dip after a trendline test. IONS fell 2.9% to end at $44.35 today, but the shares have advanced 125% from their May lows.

170223IONS

Short sellers have been piling on the biotech, with short interest up 29% over the last two reporting periods. Short interest now accounts for 11.6% of IONS' float, which would take over a week of trading to cover, at IONS' average daily volume. Should the stock bounce off familiar support, perhaps in the wake of a solid earnings showing, it could be ripe for a short squeeze. In addition, eight of 12 analysts rate the shares a tepid "hold" or worse, leaving the door open for a round of bullish analyst attention.

In the options pits, IONS sports a Schaeffer's put/call open interest ratio (SOIR) of 1.81, which is at an annual peak, indicating near-term options players are more put-skewed than they have been at any other time in the last 12 months. Furthermore, IONS' 10-day ISE/CBOE/PHLX put/call volume ratio of 12.12 is also at an annual peak, indicating an unusually high concentration of bearish bets.

Drilling down, IONS puts traded at three times their average daily volume today, and outpaced calls 9-to-1. The March 40 put was most active -- and is already home to peak open interest among all IONS options -- with one trader buying to open a block of 2,000 contracts. This options trader is either betting on or hedging against a fall below the $40 level by the time of expiration on March 17.

Last quarter, IONS moved 22% higher in the session following earnings, and the shares have averaged an 8.8% single-day move after Ionis Pharmaceuticals Inc's (NASDAQ:IONS) last four earnings reports. Currently, options markets are pricing in a much smaller 4.6% single-day swing this time around. What's more, IONS' Schaeffer's Volatility Scorecard (SVS) of 94 indicates the shares have tended to exceed volatility expectations over the last year.

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