Call Buyers Circle Red-Hot Valeant, Netflix

Netflix touched a fresh record high after a new "overweight" rating

Jan 11, 2018 at 2:36 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 drugmaker Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and streaming giant Netflix, Inc. (NASDAQ:NFLX). Below, we'll break down recent options trading activity on VRX and NFLX.

most option volume nflx vrx

Valeant Stock Has Doubled Since November

Valeant Pharmaceuticals stock has been on fire lately, more than doubling from its early November lows around $11, with help from its ascending 10-day moving average. At last check, the shares were up 2.2% at $23.95, set for their highest close since October 2016. Further, the stock notched an annual high of $24.43 just last week, and CEO Joseph Papa expects more upside. "This is a turnaround opportunity of a lifetime," Papa said at the JPMorgan Healthcare Conference yesterday.

There's still plenty of room on the bullish bandwagon, though. Despite VRX stock's impressive ascent, nine of 13 brokerage firms maintain "hold" or "strong sell" opinions, leaving the door wide open for analyst upgrades to lure more buyers to the table.

On the flip side, options traders have upped the bullish ante in the past two weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Valeant has racked up a 10-day call/put volume ratio of 5.79 -- in the 99th percentile of its annual range. In other words, traders have bought to open VRX calls over puts at a near annual-high clip recently.

Digging deeper, the February 18 call has seen the biggest surge in open interest during this time frame, with nearly 26,000 contracts added. Most of the action appears attributable to a bullish roll-up to start the year, with one trader liquidating in-the-money January 2018 17.50-strike calls to buy the longer-term calls at a higher strike, according to Trade-Alert.

Now is an opportune time to buy short-term Valeant options, too. The equity's Schaeffer's Volatility Index (SVI) of 51% is in just the 14th percentile of its annual range, pointing to relatively muted volatility expectations priced into near-term contracts. Likewise, the pharma stock sports a Schaeffer's Volatility Scorecard (SVS) of 98, indicating VRX shares had no problem handily exceeding options traders' volatility expectations in the past year.

NFLX Just Soared to a Fresh Record High

Netflix stock was last seen up 2.1% at $216.89, just off a fresh record high of $217.75. Barclays today began coverage on NFLX stock with an "overweight" rating and a price target of $245, citing the streaming giant's ability to aggregate and customize content based on subscribers' consumption habits. In addition, UBS raised its price target even deeper into uncharted territory, to $250 from $237.

The FAANG stock has been on fire in 2018, rallying 13% already this year. From a longer-term perspective, Netflix shares have picked up more than 66% over the past year. However, while more analysts are turning optimistic on Netflix stock, 12 of the 35 brokerage firms following the stock maintain "hold" or worse opinions, leaving plenty of room for more upgrades.

Short interest on the FAANG stock has dropped 17% over the past two reporting periods, but still accounts for 5.1% of the stock's total available float. At NFLX's average daily trading volume, it would take four days for the remaining shorts to cover their bearish bets – pointing to potential fuel for additional upside.

The stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 1.59 ranks in the impressive 85th annual percentile, meaning calls have been initiated relative to puts at a faster-than-usual clip in the past two weeks.

Digging deeper, the weekly 1/12 210-strike call has seen the largest increase in open interest during this time frame, with more than 4,700 contracts added. Buyers of the calls expect Netflix stock to extend its journey north of the $210 mark through the end of this week, when the options expire.

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