Teva Pharmaceutical Stock Surge Draws Fresh Batch of Options Bulls

TEVA shares are capitalizing on the FDA's latest move

Oct 2, 2017 at 2:50 PM
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Shares of Teva Pharmaceutical Industries Ltd (NYSE:TEVA) are popping today, after the Food and Drug Administration (FDA) introduced a plan to make it easier to market complex generic drugs. At last check, TEVA stock was up 5.1% to trade at $18.49. Options traders are targeting even more upside in the near term, with roughly 48,000 calls traded -- two times what's typically seen at this point in the day.

Four of TEVA's five most active options are calls that expire in the next three weeks. The October 17.50 and 20 calls have garnered the most attention, while the weekly 10/6 18.50- and 19-strike calls are also hot. It looks like traders are purchasing new positions at each option, betting on TEVA settling north of the strikes at expiration.

More broadly, TEVA options traders have shown an unusual penchant for long calls relative to puts in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 26,765 calls in the past 10 days, compared to 15,649 puts -- with the resultant call/put volume ratio of 1.71 ranking in the elevated 69th annual percentile.

This recent batch of options buyers were paying relatively tame prices on near-term contracts, too, per the stock's Schaeffer's Volatility Index (SVI) -- which settled Friday at 41%, in the 39th annual percentile. Today, though, TEVA's 30-day at-the-money implied volatility has jumped 13.5% to 47.9% -- higher than 94% of all other readings taken over the past year, meaning the options market is pricing in considerably steeper short-term volatility expectations. This could make it more challenging for today's premium buyers to maximize the leverage benefits of options.

Taking a closer look at the charts, TEVA still remains a long-term laggard. Even with today's pop, the shares are down 49.2% year-to-date and hit a 15-year low of $15.22 on Sept. 6. Plus, the $20 level has recently emerged as a stiff ceiling for Teva Pharmaceutical following an early August bear gap.

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