Options Hedges in Demand on Volatile Arrowhead Pharmaceuticals Stock

One ARWR shareholder today may be initiating a protective collar

by Karee Venema

Published on May 15, 2018 at 3:10 PM

Arrowhead Pharmaceuticals Inc (NASDAQ:ARWR) gapped to a three-year high of $10.10 yesterday, before swinging to a loss. Today, the shares have resumed their longer-term uptrend, adding 2.3% to trade at $9.64. The drug stock has added more than 163% already in 2018, and one options trader today appears to be bracing for a second-half pullback for ARWR.

arwr stock daily chart may 15

Taking a quick step back, roughly 3,400 calls and 2,700 puts have changed hands on ARWR stock so far today -- six times what's typically seen at this point, and volume pacing in the 99th annual percentile.

Most active are the December 7 put and 14 call, with Trade-Alert pointing to the possible initiation of a protective collar. If this is the case, the shareholder lowered the cost of buying a protective put outright by combining it with a covered call, hedging their portfolio on a sharp pullback in the shares through the end of the year -- a time frame that encompasses the company's potential release of data for its protein deficiency and hepatitis B treatments.

More broadly, options traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 16.50 calls over the past 10 days for each put -- albeit amid relatively low absolute volume. And while this could be at the hands of "vanilla" options bulls, short sellers may be initiating an options hedge, too. Short interest on ARWR shot 17.6% higher in the two most recent reporting periods to 6.79 million shares -- the highest since mid-July.

Regardless of the reason, it's an attractive time to buy premium on short-term ARWR options. The stock's Schaeffer's Volatility Index (SVI) of 69% ranks in the 8th annual percentile, indicating short-term options are pricing in lower-than-usual volatility expectations -- which could increase the benefit of leverage.

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