Options Update: United Therapeutics Puts Popular on Failed Remodulin Study

Shares of pharmaceutical concern United Therapeutics
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are taking a beating today, after the company announced that a new formulation of its hypertension drug Remodulin failed to meet its goal in a late-stage study.

The drug has already received approval from the Food and Drug Administration as an injectable treatment, and is current reviewing an inhaled version of Remodulin. However, the current oral version failed to show acceptable results.

Analysts have already weighed in on the failed study. Piper Jaffray said in a note to investors that “The issue with oral prostacyclins remains, at doses at which they work, they are intolerable, and at lower doses where tolerability is manageable, insufficient efficacy is seen.” The brokerage firm reiterated its “sell” rating on UTHR and noted that it has low expectations for success on another late-stage Remodulin study.

Following the news, UTHR shares plunged more than 33% to hit a new annual low. Options traders have jumped on the slip, as more than 7,800 puts have changed hands so far today, outpacing the stock’s average daily put volume by a factor of 10. Furthermore, the heavy volume has placed UTHR on our Intraday Volume Explosion Lis. However, it was the mixed activity at the stock’s soon-to-expire November 55 strike that caught my eye this afternoon.

United Therapeutics option volume details

The Anatomy of a United Therapeutics Put Position

As you can see from the chart above, nearly all of the early activity on UTHR’s November 55 put changed hands at the ask price, suggesting buy-to-open activity. However, as the session progressed, and the stock rebounded from its session lows, volume shifted toward sell-to-open. So far today, volume has easily exceeded open interest at this front month strike, and indicates that much of today’s activity could translate into fresh open interest. But is it better to buy or sell UTHR’s November 55 put?

Taking a look at the buy-to-open trade first, I noticed a block of 100 contracts changed hands at the ask price of $2.00 near 9:48 a.m. Eastern time. The total outlay for this position would be $20,000 — ($2.00 * 100)*100 = $20,000. For this trade to reach breakeven, UTHR would need to fall about 41% to $52 from yesterday’s close at $90.52 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $20,000. Today’s plunge of more than 33% has this trade hovering about 12% away from breakeven, at last check.

Meanwhile, it would appear that a sell-to-open position was initiated at 10:33 a.m. Eastern time, with a block of 100 contracts changing hands at the bid price of $1.25. The total credit for this trade arrives at $12,500 — ($1.25 * 100)*100 = $12,500. Remember, in order for a put-sell trader to retain the premium received on the position, UTHR needs to stay above the 55 level by option expiration on November 21.

So, by entering the first trading example, the investor needs UTHR to fall roughly another 12% before expiration. Meanwhile, the investor in the second example needs UTHR to hold above the 55 level through expiration. Both positions have their merits, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers that could favor 1 side over the other.

Getting Technical

Technically speaking, today’s plunge has placed UTHR below former resistance at the round-number 60 level. This region marked the upper rail of a trading range the shares occupied from June 2006 though May 2007. The lower rail of this trading range resides at the 50 level, 7 point below break even for the aforementioned purchased November 55 put. This technical picture does little to instill confidence for a sold UTHR November 55 put, however, as a pullback to long-term support would place the position in the money.

Monthly chart of United Therapeutics since April 2006

The Sentiment Drivers

The real drivers for a UTHR trade lie within the stock’s sentiment backdrop. Unfortunately these indicators also do not bode well for put sellers. Specifically, the security’s Schaeffer’s put/call open interest ratio (SOIR) of 0.74 ranks below 90% of all those taken during the past year, pointing to an extreme degree of optimism from the options crowd. Meanwhile, Zacks.com reports that 10 of the 12 analysts following UTHR rate the stock a “buy” or better. With the failure of the Remodulin study, we could see some of this optimism unwind in the form of additional selling pressure on the security, potentially forcing the shares to challenge technical support in the 52 area.

Sentiment indicators for United Therapeutics

The Verdict?

While the indicators above clearly work in favor of a purchased UTHR November 55 put, the limited time frame does not. For this trade to reach break even, the stock must fall below the 53 level before the end of the week. The recent market volatility favors this scenario to a degree, but, with sellers already having a field day today, we could see bargain hunters move on UTHR and support the stock through Friday. Traders will want to keep a close eye on Wall Street analysts and options traders, as a shift in sentiment from these groups could ultimately decide the stock’s short term fate.

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