Spruce Point: This Stock Could Sink 55%

PEN options are heating up ahead of earnings next week

Jul 31, 2019 at 1:07 PM
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Surgical instrument maker Penumbra Inc (NYSE:PEN) is among the worst stocks on the New York Stock Exchange (NYSE) today, due to a scathing note from Spruce Point Capital Management. The research firm issued a "strong sell" opinion on PEN shares, and predicted 40% to 55% downside risk for the "one-trick pony" amid a "wave of competition." Against this backdrop, Penumbra shares are on pace for their worst session since late February, and options are running much hotter than usual ahead of earnings next week.

PEN was flirting with record highs as recently as July 25, peaking at $185.70 -- a 67.5% rally from its Dec. 24 low of $110.84. Now, the equity has pared its July gain to just under 4%, last seen 8% lower at $165.17. However, the security could find a foothold in the $160 region, which acted as resistance until switching to support back in June.

PEN stock chart july 31

Penumbra is slated to report earnings after the close on Tuesday, Aug. 6. After the last eight quarterly reports, PEN stock moved an average of 8.5%, regardless of direction, in the subsequent session. This time around, the options market is pricing in a bigger reaction, at 12.8%.

While absolute volume remains light, the roughly 400 PEN calls and 240 puts traded so far today represent five times the average intraday options volume -- pacing for the 98th percentile of its annual range. Most active so far is the August 165 call, where it looks like one trader sold to open a block of 150 contracts. By writing the calls to open, the seller expects PEN shares to remain south of $165 through the close on Friday, Aug. 16, when front-month options expire.

The equity's 30-day at-the-money implied volatility has rocketed to 59.1% today -- in the 91st percentile of its annual range. With another possible volatility catalyst around the corner in the form of the company's earnings release, it's not too surprising to find near-term option premiums relatively inflated. By selling the calls instead of simply buying puts, the aforementioned option bear can capitalize on higher-than-normal option prices.


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