Options Update: Myriad Genetics Targeted by a Bearish Put Debit Spread
Earlier this week, Myriad Genetics
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PowerRating) announced that it received approval from the NYSE’s Listing and Compliance Committee to proceed with the transfer of MYGN trading from the NASDAQ to the NYSE.
Myriad said it anticipates making the switch in the second calendar quarter of 2009. Once the shares begin trading on the NYSE, the stock’s ticker will switch to “MGX” on the Big Board.
Whether due to the move or not, MYGN has attracted a considerable degree of put activity this week. In today’s trading, more than 16,000 contracts have traded at the stock’s January 2009 40 and 50 strikes, placing the equity on today’s Intraday Volume Explosion List. The activity appears to be related, and could be part of a bearish put debit spread, which is what caught my eye today.
The Anatomy of a Myriad Genetics Debit Spread Position
Digging into this call activity, I noticed that a block of 6,234 contracts changed hands at 10:14 a.m. Eastern time on both the January 40 and 50 strikes. The January 40 puts traded at the bid price of $0.05, while the January 50 puts crossed at the ask price of $0.35. Assuming these trades are related, the total cost of this position is arrived at by subtracting the credit received from selling the January 40 put — ($0.05 * 100)*6,234 = $31,170 — from the cost of buying the January 50 put — ($0.35 * 100)*6,234 = $218,190. By doing so, the total outlay for this trade would be $187,020 — $218,190 – $31,170 = $187,020.
The maximum profit for this trade is achieved when MYGN falls to, but does not trade below, the sold January 40 put. The maximum loss is limited to the initial investment of $187,020. By entering this trade, the investor is indicating that he expects MYGN to fall sharply during the next month – the 40 level lies more than 39% below the stock’s current trading range. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
A put position on MYGN appears rather counter intuitive when you take into account the stock’s strong technical performance. As the saying goes, “the trend is your friend,” and MYGN’s trend is solid. Since the beginning of the year, the shares have soared more than 42% higher. During this time frame, the equity has enjoyed the support of its 10-week and 20-week moving averages. MYGN has finally reestablished a solid base above these trendlines, following a bit of a hiatus for most of November. The shares are also trading above potential short-term support at the 65 level. There is the potential for overhead resistance in the 69-70 region, but given the stock’s strong uptrend, a January 50 put seems too far out of the money to achieve profitability.
The Sentiment Drivers
Despite the stock’s strong price action, investors remain heavily bearish on the equity. Specifically, MYGN’s Schaeffer’s put/call open interest ratio (SOIR) of 3.57 indicates that puts more than triple calls among near-term options. This ratio also ranks above all but 3% of those taken during the past year, underscoring the extremely bearish sentiment from the options crowd.
Short sellers are also betting against MYGN in droves. During the most recent reporting period, the number of MYGN shares sold short jumped by more than 8.5%. This accumulation of bearish bets now accounts for nearly 22% of the stock’s total float, and could provide for a sizable short-covering rally should the equity break out above resistance in the 69-70 region.
The Verdict?
Looking at the technical and sentiment indicators above, it would appear that MYGN should continue its year-to-date uptrend. As such, an unwinding of pessimism in the options pits and among short sellers could provide the needed buying pressure to send the shares through overhead resistance. That said, MYGN is a pharmaceutical concern, and any FDA announcements or drug trials that don’t go according to plan could quickly scuttle the stock’s strong price action. If you decide to enter a long position on MYGN, be sure to keep a close eye out for these types of announcements, and have an exit strategy prepped and ready to go.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.