Option Bears Flocking to General Electric, Valeant Stock

Both GE and VRX stocks have seen unusual put activity lately

Managing Editor
Aug 21, 2017 at 3:12 PM
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There's been notable options volume lately on blue-chip General Electric Company (NYSE:GE) and drug stock Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Here's a quick look at how options traders have been placing their bets on GE and VRX stocks. 

The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Stocks highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.


MAO Aug 21

Put Buyers Lining Up Around General Electric

General Electric stock is down 0.1% to trade at $24.52 -- and just off a fresh annual low of $24.32 -- pacing for a fifth straight daily loss. GE stock has shed 22% year-to-date, and its 80-day moving average has contained breakout efforts since mid-January. The stock suffered an earnings-induced bear gap in July -- much to the dismay of options traders at the time -- and has been exploring new lows since.

The equity has underperformed the broader S&P 500 Index (SPX) by nearly 12 percentage points during the past three months. However, despite the stock's troubles, five out of 11 analysts maintain a "buy" rating. Should GE continue to sink, the bullish analysts may jump ship, sending GE stock even lower.

Short interest, on the other hand, has been climbing. The 108 million shares of GE sold short is the highest point since December, yet only accounts for 1.3% of the stock's total available float. This means that there is plenty more room on the short-selling bandwagon, should GE's struggles continue.

In the options pits, traders have been favoring calls on an absolute basis; more than 246,933 calls have been traded in the past 10 days, compared to 220,521 puts. However, put buying has picked up as of late -- data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows GE with a 10-day put/call volume ratio of 1.41, which ranks 5 percentage points from a 52-week high.

VRX Put Options More Popular Than Usual

Valeant Pharmaceuticals stock is down 1.8% to trade at $14.13. The stock has rallied nearly 74% since touching a low of  $8.31 on April 24, but has lost some steam since peaking above the $18 level in July, with traders expressing concern about an Australian tax audit. VRX is now testing a foothold atop its 200-day moving average.

Of the 11 brokerages covering VRX shares, eight rate them a "hold" or worse. There still remain plenty of short sellers hanging around VRX, too. Although short interest decreased by nearly 9% during the last reporting period, it still accounts for a healthy 10% of the stock's total available float.

In the options pits, 338,150 VRX calls have been traded in the past 10 days, compared to just 250,247 puts. However, after the expiration of thousands of August-dated calls on Friday, VRX stock's Schaeffer's put/call open interest ratio (SOIR) of 1.22 is at the highest point from the past 12 months. This suggests that near-term option traders have not been more put-biased in the past year.

Digging deeper, it appears much of the put open interest is coming from the October series. More specifically, both the October 15 and 16 puts have over 20,000 contracts outstanding apiece, and more than 10,000 of the 16-strike puts were added in just the past two weeks. "Vanilla" traders buying to open the puts aren't expecting VRX to eclipse the $15-$16 level in the coming months.

The good news for VRX traders is that near-term options are attractively priced. Its Schaeffer's Volatility Index (SVI) of 48% is higher than just 5% of all other readings from the past year, implying that near-term options are pricing in relatively low volatility expectations. Furthermore, the shares' Schaeffer's Volatility Scorecard (SVS) sits at 100, indicating VRX stock has exceeded options traders' volatility expectations during the past year.


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