Options Update: Amgen Sees Heavy Post-Earnings Option Activity

Yesterday, after the closing bell rang, biotech firm Amgen
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reported third-quarter, ex-item earnings of $1.23 per share, 14 cents better than the consensus estimate. AMGN also topped expectations with its quarterly revenue. In the third quarter, the biotech giant realized revenue of $3.88 billion when the Street forecast $3.68 billion. My colleague Joseph Hargett theorized yesterday that the results might “squeeze an upgrade or 2 out of the remaining holdouts.” While this hasn’t happened, the strong results were enough to help AMGN withstand a price-target cut from S&P Equity Research.

AMGN has been all the rage in the options pits today, just check out our Intraday Volume Explosion List. AMGN has seen heavy activity on both the call and put sides of the aisle.

On the put side, AMGN has seen total volume increase more than 3.5 times the norm. The majority of this activity has taken place on the November 50 contract (AMQ WJ). Digging through the numbers showed that most of this action was small in nature, suggesting individual investors were the busiest. There were 2 notable blocks of contracts that crossed the tape, but both carried a “late” designation – rendering it impossible to determine the nature of the activity until tomorrow.

On the call side, AMGN’s total activity spiked more than 7.5 times that of a normal day. Roughly a quarter of this activity crossed on the November 60 contract (YAA KL). When I went on my expedition to uncover interesting activity on this particular bet, I noticed a block of 1,000 contracts that crossed the tape at 10:58 AM EST. The 1,000 contracts were broken into 3 blocks: 530, 258, and 212. All of these blocks crossed at the ask price, suggesting 2 things: that these contracts are related; and that the contracts were purchased. So, let’s work on that assumption as we analyze AMGN.

Before going any further, let’s take a look at the money laid out. If my assertion is correct and this is a straight up call purchase, then the hypothetical purchaser dished out $171,000. We arrive at this number by taking the total number of contracts (1,000) and multiplying it by 100 (to get 100,000). We then multiply the result (100,000) by the contract price ($1.71) to get the total premium paid ($171,000). In order for our option purchaser to break even, the stock will have to advance past $61.71 (strike price + the premium paid per contract).

Taking the Happy Pill

Analysts and option players alike are bullish toward AMGN (if you couldn’t tell by this section’s title). According to Zacks, AMGN earns 10 “strong buys,” 2 “buys,” and 4 “holds” from analysts. This configuration leaves the door wide open for momentum-killing downgrades – which are unlikely following such strong earnings performance.

As for option players, the bulls have it as well. AMGN’s Schaeffer’s put/call open interest ratio (SOIR) checks in at 0.64, which is higher than 24% of all the readings taken during the past 52 weeks. With total call activity outnumbering total put activity roughly 2-to-1 today, I’d expect this bullish percentile ranking to drop even lower tomorrow. The problem for AMGN is that the bullish feelings could subside, and even unwind in the form of selling pressure – pushing the stock lower in the process.

Immune to the Credit Crunch?

Yeah, really, really, really bad pun there – sorry. AMGN has performed admirably during the recent market turmoil. In fact, despite a 15% drop in performance during the past 4 weeks, the shares are still up 7% on a year-to-date basis. That said, $61.71 (breakeven) is a long way off, and our hypothetical option player chose November options – leaving very little time for this move.

Is $61.71 possible? Yes, I have been taught that anything and everything is possible in this wild world we call the stock market. However, it could prove difficult. AMGN’s current rally seems to have met its match in the form of its 10-week moving average. This trendline has provided resistance in each of the last 6 weeks, and it has assumed a descending position. This trendline is on track to bearishly cross its 20-week counterpart, which could be a bearish omen.

My biggest technical concern for AMGN comes in the form of its 80-month moving average. This trendline is positioned just south of the 60 level, leaving it in a position to provide resistance. Yes, this trendline has been breached recently, but it could continue in its role as resistance. Should the 80-month moving average fail as resistance, AMGN’s 50-month trendline is lurking in the 62 region (which could allow the stock to hit the all-important breakeven level).

Should all of this resistance fail, the 65-to-70 region could resume a prior resistive role. Of course, this region would have a chance to act as resistance only if the potential trendline resistance fails.

Monthly chart of Amgen Since January 2000 With 50-Month and 80-Month Moving Averages

The Verdict?

Purchasing a November 60 call is a gutsy play, but of course it could pay off. That said, chances are that the stock will hit overhead resistance and stagnates for a while. For the sake of our hypothetical call purchaser, I hope it is the 50-month moving average, and not the 80-month trendline.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.