Call Buying Spikes as Paratek Pharmaceuticals Stock Crushes Shorts

Volatility expectations are jumping on Paratek as takeover chatter swirls

Aug 31, 2017 at 1:07 PM
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Near-term volatility expectations are surging on Paratek Pharmaceuticals Inc (NASDAQ:PRTK) today, per the stock's 30-day at-the-money implied volatility -- up 23.5% to 105.4%, and in the 87th annual percentile. This comes as call traders blast PRTK stock, with nearly 3,700 call options traded so far -- seven times the expected intraday amount of 541 -- and volume on track to settle in the 98th annual percentile.

More than three-quarters of this activity has centered at the September 30 call, PRTK's most active option. This is mostly due to a 2,000-contract block that was likely bought to open for an initial cash outlay of $300,000 (number of contracts * $1.50 premium paid * 100 shares per contract) -- which also represents the maximum risk on the trade, should the stock settle south of $30 at the close on Friday, Sept. 15, when the options expire. Profit, meanwhile, will accumulate on a move north of breakeven at $31.50 (strike plus premium paid) -- two-year-high territory.

Widening the scope reveals a growing bias toward long calls in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 6.84 calls for every put on PRTK in the past two weeks. As it turns out, the September 30 call has been the most active option over this time frame, and data from the major options exchanges confirms the bulk of the action has been of the buy-to-open kind. 

On the charts, Paratek Pharmaceuticals shares haven't traded north of $30 since June 2015. However, the stock has been ripping higher in recent weeks, on speculation it could put itself up for sale. In fact, since dipping below the $19 mark early last week, PRTK shares have surged nearly 50%. Plus, the security hit a two-year high of $29 earlier, last seen up 5.1% at $27.95.

Considering there's no apparent news driving today's jump, it's possible a short squeeze is underway. Short interest on Paratek stock jumped 9.9% in the most recent reporting period to 2.67 million shares -- the most on record. Heading into today's trading, it would've taken short sellers almost a week to cover these bearish bets, at the average pace of trading.

With the booming biotech trading in multi-year-high territory, it's also possible that some of the recent call buying is a result of short sellers hedging their bearish bets against any additional upside risk. With volatility expectations on the rise, though, it's getting more expensive to initiate these options hedges.

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