Options Update: Bristol-Myers Squibb Calls Spike on Abbott Labs Settlement

Earlier today, pharmaceutical concern Bristol-Myers Squibb
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settled a dispute with Abbott Laboratories
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related to an alleged patent infringement, according to the Dow Jones Newswire. According to a document filed with the Securities and Exchange Commission, the parties entered the settlement earlier this month. The news has helped stoke speculation on the equity, with options traders extending their preference for BMY call options.

During the past 2 weeks, call buying has been all the rage on the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE). The 10-day ISE/CBOE call/put volume ratio has swelled to an impressive 11.82, as calls bought to open have outnumbered puts purchased by nearly 12 to 1. This ratio also ranks above 90% of all those taken in the past year, highlighting this groundswell of optimism for BMY.

This bullish sentiment is extending into today’s trading, as more than 11,000 BMY calls have changed hands so far. In fact, call volume has more than doubled the stock’s daily average, helping to place the security on our Intraday Volume Explosion List. Digging into the activity reveals a fair amount of apparent call selling, which I expect represents traders closing out their positions ahead of today’s February options expiration. Furthermore, the selling at the March 20 call, highlighted in the chart below, could be the closure of positions as BMY tests technical support at the 20 level.

Bristol-Myers Squibb put volume details

The Anatomy of a Bristol-Myers Squibb Call Position

However, there is still a healthy degree of call buying taking place, especially at the March 20 strike. Specifically, 2 blocks totaling 200 contracts traded at 9:52 a.m. Eastern time at the ask price of $1.22. Assuming that these contracts were all placed by the same trader and bought to open, the total outlay for this position would be $24,400 — ($1.22 * 100)*200 = $24,400. For this trade to reach breakeven at expiration on March 20, BMY would need to rally about 3.5% to $21.22 from yesterday’s close at $20.51 per share. The maximum loss for this position is the initial outlay of $24,400.

By entering this trade, the investor is indicating that he expects BMY to bounce back from today’s losses by the time the options expire. With the heavy selling pressure in the broader market, the stock’s decline is dangerously close to breaching key round-number support in the 20 area. That said, let’s take a look at the stock’s technical and sentiment backdrops for any drivers that could potentially turn this trade around.

Getting Technical

Technically speaking, BMY has outperformed the S&P 500 Index (SPX) by more than 10% during the past 60 trading days. Still, the shares are off nearly 12% so far this year, and appear to be gaining momentum. BMY is fresh off a rejection at its 20-month moving average, and has slipped back below long-term resistance at its 10-month trendline. The security has not closed a month above this duo since November 2007.

Meanwhile, the security continues to tempt fate by repeatedly slamming into support at the 20 level. BMY has traded below, but not closed a month south of this psychologically important region since April 1996. As such, I am left wondering just how long the equity can maintain this region before it succumbs to selling pressure.

Monthly chart of Bristol-Myers Squibb since June 2007 with 10-month and 20-month moving average

The Sentiment Drivers

Investors, however, are betting that the 20 level will hold firm. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.48 indicates that calls more than double puts among near-term options. This ratio also ranks in the lower third of its annual range, helping to confirm the bullish indications given by the ISE/CBOE data I mentioned above.

Elsewhere, short sellers are shying away from the stock, as the number of BMY shares sold short dropped by 18.5% during the most recent reporting period. As a result, a paltry 1% of the stock’s float is sold short, leaving very little in the way of potential sideline money to help bolster the equity.

Finally, Wall Street is also firmly entrenched in the bulls’ camp. Currently, 7 of the 13 analysts following BMY rate the shares a “buy” or better, with nary a “sell” to be found. Any downgrades from this bullish bunch could provide additional selling pressure for the security.

Sentiment indicators for Bristol-Myers Squibb

The Verdict?

Bullish BMY investors may take heart from the fact that the shares have not closed a month below the 20 level in the past year, despite numerous close calls. However, this same optimism could become the stock’s undoing should the situation turn unexpectedly south – see October 2008’s plunge to $16 per share. That said, there are takeover rumors floating around on Wall Street regarding BMY. As such, I would be hesitant to place a bet on either side of the bull/bear aisle. Should these rumors prove false, I would have to believe that the path of least resistance for BMY remains to the downside.

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