Options Traders Eye Another Volatile Earnings Reaction for Valeant Pharmaceuticals Stock

One VRX call writer may be hoping for a post-earnings volatility crush

Aug 7, 2017 at 11:47 AM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has a history of making volatile moves in the session subsequent to the company's earnings report. In the past eight quarters, VRX stock swung by double-digit percentage points the day after earnings six times -- including a 24.1% pop in May, and a 13.9% plunge in February. On average, though, the shares have moved 19.8%, regardless of direction. This time around, the options market is pricing in a 22.3% move for tomorrow's trading, with Valeant earnings due ahead of the open.

VRX options traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 56,109 calls, compared to 13,171 puts in the two weeks leading up to the big event. The resultant call/put volume ratio of 4.40 ranks in the 98th annual percentile, pointing to an extreme bullish bias among speculative players.

Drilling down, the weekly 8/11 15- and 17.50-strike calls have seen two of the biggest increases in open interest over the past two weeks, with nearly 8,600 contracts collectively added. Data from Trade-Alert points to buy-to-open activity at each, suggesting options traders are betting on a post-earnings pop for VRX shares.

On the flip side, call writers have targeted the August 17.50 strike in recent weeks, with 2,219 positions sold to open here last Thursday on the major options exchanges. By initiating the short calls, the expectation is for VRX to remain below $17.50 through front-month options expiration at next Friday's close -- or perhaps for the trader to profit from a post-earnings volatility crush.

Today, VRX options trading is brisk, with 43,658 contracts on the tape -- putting volume on track to settle in the 85th annual percentile. Most active is the weekly 8/11 16-strike call, due to a 4,460-contract block that may have been bought to open and tied to stock. Also hot is the weekly 8/11 14-strike put, where new positions are likely being purchased. If this is the case, the goal is for VRX stock to end the week south of $14.

On the charts, Valeant stock has been on fire since skimming eight-year low territory near $8.30 in late April -- up more than 83% to trade at $15.17. And while the shares are trading near this historically bullish trendline, they are staring up at a potential speed bump near $18, which is home to a 38.2% retracement of their August 2016 highs to 2017 lows.

Meanwhile, Mizuho this morning warned "a correction is likely" for VRX stock after earnings, considering the shares rallied on debt reduction headlines, "but not much has changed in the underlying business." Overall, most analysts are wary of Valeant shares, with eight of 11 maintaining a "hold" or "strong sell" recommendation ahead of earnings.

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