Options Traders Eye Bigger Bounce for Surging Valeant Stock

Valeant stock options are trading at an accelerated clip today, as the stock rallies

May 2, 2017 at 12:34 PM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is on track to meet a $5 billion debt repayment by no later than February 2018, according to CEO Joe Papa. The news is being well-received among traders, with VRX stock up 6% at $14.01. The surge is stoking VRX options volume, with nearly 52,000 contracts traded so far, two times what's typically seen at this point in the day. 

Diving deeper, the bulk of the day's activity has occurred on the call side, with 43,000 calls and 8,700 puts traded. Most active are the weekly 5/5 10.50-strike and July 10 calls, where more than 13,000 contracts have collectively crossed the tape. It seems safe to assume new positions are being purchased -- a theory echoed by Trade-Alert -- meaning call buyers expect VRX stock to extend today's rally in the near term.

Today's call-skewed trading is nothing new in VRX's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 55,328 VRX calls in the last 10 sessions, compared to 24,503 puts. The resultant call/put volume ratio of 2.26 ranks in the 62nd annual percentile, pointing to a slightly unusual bias toward long calls relative to puts. 

Drilling down, VRX's weekly 5/5 10-strike call has seen the biggest rise in open interest over this time frame, with nearly 6,700 contracts added. While data from the major options exchanges confirms notable buy-to-open activity here, traders may have had an ulterior motive. Specifically, more than 16% of VRX's float is sold short, suggesting some of the recent call buying could be a result of short sellers hedging their bearish bets against any upside risk.

In fact, today marks VRX stock's first trek into double-digit territory since early April, and its first trip above its 30-day moving average since late February. Longer term, VRX shares are down 96% from their August 2015 all-time peak of $263.81. Amid this devastating price action -- and a string of fundamental woes that prompted Bill Ackman to call his Valeant stake a "huge mistake" -- Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is considering a name change, according to Bloomberg. "We are looking at alternatives," said Papa earlier at VRX's annual shareholder meeting.

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