Options Update: Option Players Stock Up on Teva Pharmaceuticals After Its Acquisition

• July 18, 2008
• Mark Fightmaster

Teva Does Some Shopping

Earlier, my colleague Andrea Kramer took a look at Israeli-based Teva Pharmaceuticals’
purchase of its rival, Barr Pharmaceuticals
. TEVA will take on $1.5 billion of BRL’s debt, and will give BRL shareholders $39.90 in cash and 0.6272 share of a TEVA American Depositary Receipt for each share they own. As Andrea noted, TEVA is the largest pharmaceutical firm in the world and the acquisition is hoped to help expand TEVA’s presence in the U.S. and Central and Eastern Europe.

With options expiring following today’s session, I was hoping to find a company that was subject to some non-July option activity, and it appears that TEVA’s news and subsequent 5% gain today has given option players reason to jump into August options. It is this activity that caught my eye today.

According to today’s Intraday Volume Explosion List, both put and call options are active on TEVA. As for puts, the August 42.50 contract (TVQ TV) has comprised a majority of the day’s activity. En masse, 17,651 total puts have traded thus far today, with 7,514 of those contracts crossing on TVQ TV. Over on the call side, the largest volume crossed on the August 45 contract (TVQ HI). Of the 16,864 total calls crossing the tape, nearly 4,000 of these were on TVQ HI.

There were no major transactions on either the put or the call side; a lot of blocks of 100, but not much more than that. With the stock trading in the 43 region, call purchases could suggest heightened expectations – and vice versa with the puts. However, if the calls are liquidations, it could be a knee-jerk reaction to this morning’s news.

Teva-licious

At least, that is what 5 of 11 analysts following the pharmaceutical firm feel. According to Zacks, TEVA receives 5 “strong buys” and 6 “holds.” This slightly bullish configuration could lead to upgrades, which could push TEVA shares higher. Of course, if the 5 ultrabulls aren’t happy with today’s purchase, TEVA could see momentum-killing downgrades.

Option players are also slightly bullish, but they leave room for the stock to advance further. TEVA’s Schaeffer’s put/call open interest ratio (SOIR) of 0.65 is lower than 69% of those taken during the past 52 weeks. Yes, the optimism could unwind and push the stock lower, but the inverse is also true. There is still room for pessimism to unwind and help usher the shares higher.

Good Medicine?

The last time I looked at TEVA, I used a monthly chart with the equity’s 20-month and 32-month moving averages as lines of support, and they have held (much to the surprise of many of my readers). As these trendlines continue their upward path, I would expect them to take the stock along for the ride. That said, resistance does lurk slightly overhead in the form of TEVA’s 10-month moving average.

A quick glance at August’s open interest configuration indicates that option players believe TEVA will have a strong month. Peak call open interest resides at the out-of-the-money 47.50 strike, with the 45 strike falling in second place. Peak put open interest for the month checks in at the 40 strike, with 42.50 coming in second. The call open interest is much higher … indicating bullish feelings.

The Verdict? Yes, the Street holds TEVA in a bullish light, but its technical performance indicates that these feelings are valid. The monkey wrench in the plan is the company’s earnings report on July 29. This news event could push the stock drastically higher or lower – depending on the results. On our blog, I took a look at the biotech and pharmaceutical sectors as potential safe havens … I will monitor this situation – but I will say this: I like TEVA.

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.

Want more of my thoughts on the market? Don’t like my views and want to see those of my colleagues Andrea, Elizabeth, Jocelynn, Colleen, or Joe? Make sure to check out our Schaeffer’s Daily Market Blog section throughout the trading day.

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