Valeant Stock Bull Gap Sparks Heavy Options Trading

Bulls expect the stock to close the week at levels not seen since January

by Karee Venema

Published on May 8, 2018 at 11:42 AM
Updated on Jun 24, 2020 at 10:16 AM

Shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are surging today -- up 15.9% to trade at $21.05, and on track for their best day since Nov. 7 -- after the drugmaker reported stronger-than-forecast first-quarter adjusted profit and sales, boosted its full-year revenue forecast, and said it is changing its name to Bausch Health Companies Inc (BHC), effective July 2018. Options traders are climbing on for the ride, too, and most are betting on bigger short-term gains.

At last check, roughly 73,500 calls and 32,500 puts have traded on VRX stock -- 10 times what's typically seen at this point in the day, and volume pacing in the 99th annual percentile. Most active is the weekly 5/11 21-strike call, where it looks like new positions are being purchased for a volume-weighted average price of $0.49. If this is the case, breakeven for call buyers at this Friday's close is $21.49 (strike plus average premium paid).

Earlier today, VRX shares topped out at an intraday peak of $21.28, and haven't notched a weekly close north of $21.49 since Jan. 19, with this level corresponding to the equity's late-January bear gap. However, the stock's recent trajectory has been higher amid relatively low-volume trading, with Valeant up more than 41% from its early April lows near $15. The shares are also trading back above their 100-day trendline, which has kept a tight lid on VRX since a Feb. 28 sell-off.

vrx stock daily chart may 8

Should Valeant extend today's upside, a continued round of short covering could help keep the wind at the stock's back. Although short interest declined 14.6% in the most recent reporting period, there are still 22.32 million VRX shares sold short -- or nearly four times the stock's average daily pace of trading.

Plus, analysts have yet to react to today's VRX bull gap, and a round of positive brokerage notes could draw more buyers to the table. Of the 12 analysts covering Valeant Pharmaceuticals, seven maintain a "hold" or "strong sell" rating, while the average 12-month price target of $17.12 is a roughly 18% discount to current trading levels.


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