Shares surged 25% Tuesday after the Canadian drug maker affirmed its earnings outlook for the year. Two days later the stock plunged more than 9% on reports that federal prosecutors are investigating whether it defrauded insurers.
The whipsawing in prices made for a particularly rough week for options traders who’d positioned themselves for shares to fall post-earnings, only to reverse their bets after shares rallied Tuesday.
A quick recap: Ahead of the earnings report, traders took out more bets on shares falling than rising, according to options data provider Trade Alert. Then Valeant announced Tuesday it was affirming its earnings outlook for the year. Shares surged, and about $1.4 million worth of put options taken out Monday looked as though they were now worthless. The options market then effectively reversed its stance. Traders swooped in to buy 411,000 call options (versus 229,000 put options) over the next two days. Call options grant the right to buy shares at a certain price–the strike–by the option’s expiration, while put options give the buyer the right to sell shares at the strike price by time of expiration. |