Options Update: Option Players Call on Wyeth

• August 8, 2008
• Mark Fightmaster

Going Off the Board

I really, really, really wanted to title this section Harden My Heart, but I thought that I may get some nasty emails … so I’ll put the Quarterflash reference in the text, which no one reads. Earlier today, U.S. health officials issued a warnings about a rare type of muscle injury seen when the cholesterol drug simvastatin is combined with amiodarone, an anti-arrhythmia medication. The muscle injury can lead to kidney failure or death.

Simvastatin is an ingredient in Merck’s
and Abbot Laboratories’
Simcor, and it is sold generically. It is also a component in MRK’s and Schering-Plough’s
Vytorin. Amiodarone is an ingredient in Wyeth’s
Cordarone and is also sold generically.

When I saw this news, I thought that WYE would be down substantially, since it was the only pharmaceutical firm listed as using amiodarone in the story (disclaimer: I am not saying that WYE is the only firm that uses amiodarone, but the story does not list others). I went to check out the price and noticed that WYE is more than a percent higher today despite this news. This price action is what caught my eye today.

I went off the board a bit today, steering away from the Intraday Volume Explosion List. I went to the news instead and then to the options arena … but I didn’t come up empty. Check out the graphic to the right for the active WYE options.

Sickening Sentiment?

Is there a reason for all of this call activity? WYE HV is currently in the money, as the stock is trading in the upper-43 region. This activity could have been liquidations in order to cash in on the position. However, the 45 calls are out of the money and face some technical resistance (which we will get to momentarily), so it would be nice to see some pessimism that could unwind when looking at WYE’s sentiment. Unfortunately, that isn’t the case as far as option players are concerned. WYE’s Schaeffer’s put/call open interest ratio (SOIR) of 0.54 indicates that calls outnumber puts nearly 2-to-1 in the front 3-month option series. Furthermore, this reading is lower than 86% of those taken during the past 52 weeks, signaling that option players have been more bearishly aligned just 14% of the time during the past 52 weeks. Should this optimism unwind, we could see the stock pushed lower on a wave of selling pressure.

Analysts provide a bit of a chance for upside pressure. According to Zacks, brokerage houses issue 4 “strong buy” ratings, 5 “holds,” and 1 “sell” on WYE. Should the bears feel like taking action and issuing upgrades, the stock could enjoy a run higher. Of course, the opposite is true as far as the bulls are concerned. Those “strong buy” ratings carry a lot of weight when they are lowered.

Needing a Shot in the Arm

The mixed sentiment is not surprising when you look at a monthly chart of WYE. The stock has been range-bound for the better part of the current century. While the stock has wandered around a bit, the 2 constants have been the 50 level and the 40 level. Now that the stock has kicked into a downleg in its current trip sideways, we could see the 40 level act as support.

Of course, this assumption is based on the stock’s history. However, a look at WYE’s past also shows that we need to be wary of the overhead resistance leveled by its 10- and 20-month moving averages. This gruesome twosome has led the stock lower since July 2007 and the 10-month has assumed a sharply descending pattern. This moving average could force the stock into a rather severe test of the 40 level.

While there is a good chance for the 42.50 call to finish in the money, I find it hard to believe that the 45 contract will have the same luck. This assertion doesn’t mean that such a move is impossible, but the 10-month moving average’s position below 45 will make a breach of that level difficult.

The Verdict? Wishy-washy performance deserves wishy-washy sentiment, and that is what we have with Wyeth. Does this mean you should give up on the stock? No, run with your bullish feelings if you want … I’m going to wait for a significant technical break (above 50 or below 40) before wading into the fray.

If you have any questions or comments, make sure to email me. I will do my best to answer your question or address your concern.

Did you know that you can get headlines for my articles emailed directly to you? If you’d like to take advantage of this service, simply click here and sign in with your Schaeffer’s username and password. Once on the alerts page, select author from the first drop down box, select how often you want to be alerted (intraday, daily, weekly, or monthly), and enter Mark Fightmaster into the third box.

Copyright Schaeffer’s Investment Research. https://www.schaeffersresearch.com