Options Traders Take Aim At These 2 Drug Stocks

TEVA stock is down big in 2017

Managing Editor
Dec 11, 2017 at 1:56 PM
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The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Stocks highlighted in yellow are new entries to the list. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. Two names to note are biotech stocks Valeant Pharmaceuticals International, Inc. (NYSE:VRX) and Teva Pharmaceutical Industries Ltd (NYSE:TEVA). Below, we'll break down recent options trading activity on VRX and TEVA.

MAO Dec 11

Call Traders Piling On Soaring VRX Stock

Valeant Pharmaceuticals stock is up 3.9% to trade at $20.47 today, earlier hitting an annual high of $20.73. Last week, Cantor Fitzgerald expressed optimism over the company's upcoming drug launches, noting specifically that its launch of Vyzulta this month could be better than expected. VRX stock has added over 41% in 2017, and has outperformed the broader S&P 500 Index (SPX) by nearly 42 percentage points during the past two months.

During the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 3.79 Valeant call options for every put. This reading sits just 11 percentage points from an annual high, showing such a demand for calls over puts is quite unusual.

Digging deeper, the January 17.50 call is home to the largest increase in open interest during this time frame, with nearly 31,000 contracts added. According to data from the major options exchanges, there has been a mixture of buy-to-open and sell-to-open activity here. Those buying the calls expect Valeant stock to maintain its momentum, while those writing the calls are betting on the strike to hold as a near-term ceiling.

Today, options traders are once again favoring calls, which are trading at two times the expected intraday rate, with more than 87,000 traded so far. In fact, call volume is on pace for the 96th percentile of its annual range. Furthermore, the equity's Schaeffer's Volatility Scorecard (SVS) of 98 suggests the drug concern has consistently rewarded premium buyers over the past year by making bigger-than-expected moves on the charts.

TEVA's Struggles Weighing On Options Traders

There is no sugarcoating TEVA's struggles. The biotech stock has shed 54% in 2017, and fell to a 17-year low of $10.85 on Nov. 2. However on Friday, the much-maligned drug stock made a rare upside move. Today, TEVA stock is up 2.5% to trade at $16.47, nearing its 100-day moving for the first time since early August. Cantor Fitzgerald is also hopeful, citing Teva's three solid drug launches later this month and upcoming details on its restructuring plan due in a few weeks.

The drug stock continues to be a target of short sellers. Short interest increased by 36% during the last reporting period, to 92.80 million shares, an all-time high. Analysts, however, remain resoundingly bearish. Of the 22 brokerages covering TEVA, 19 rate the shares a "hold" or worse.

Call buyers have been active on TEVA, and perhaps some of that -- at least at out-of-the-money (OOTM) strikes -- is potentially attributable to short sellers seeking an options hedge. The security has a 10-day call/put volume ratio of 2.67 at the ISE, CBOE, and PHLX, which ranks five percentage points from a 52-week high.

The largest increase in front-month open interest during this time was at the December 16 call, where nearly 30,000 positions were added. However, the majority of this activity seems to be of the sell-to-open kind, which indicates options traders see the $16 level as short-term resistance.

Today, options traders are favoring TEVA puts, which are trading at two times the expected intraday rate, with more than 47,000 traded so far. In fact, TEVA put volume is on pace for the 98th percentile of its annual range.



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