Valeant: Playing the Trading Range In VRX Stock

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Shares of Valeant (VRX) have rebounded sharply off the recent lows of around $70, trading up to $97.64 on Monday following news that Bill Ackman boosted his stake in VRX stock to 9.9% from the previously reported 5.7%.

Valeant: Playing the Trading Range In VRX StockMost of the new stake was in the form of options, using a combined long call/short put position in mostly OTC options, buying calls and selling puts to add an additional 12,500,000 shares of exposure. This puts Mr. Ackman’s stake via Pershing Square at 34,118,551 shares of VRX stock.

The rally in VRX was short-lived, however, with shares falling back to close at $87.45 Tuesday.

VRX Stock’s Boundaries

VRX
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VRX stock now appears to be in a trading range, albeit wide, bounded by $110 to the upside and $70 to the downside, with $95 being the swing point.

Like Pershing Square and Bill Ackman, I am looking to use options to position, but in a more neutral manner. While implied volatility has come down from the recent extremes of 120%, it is still trading north of 80%, making short-option strategies very viable.

The large option trade by Pershing Square will likely have a dampening effect on both realized and implied volatility going forward. The recent note from Citigroup initiating coverage on VRX with an “overweight” — and signaling the worst may be over — may serve to calm the recent enormous daily price swings seen in VRX stock as well.

With a trading range now established, the strikes can be structured right at the support and resistance areas, with the expectations that VRX will remain between these levels at January expiration.

Specifically, I would look to sell the VRX Jan $110/ Jan $115 call spread for 80 cent net credit, while simultaneously selling the VRX Jan $65/ Jan $60 put spread for a $1.15 net credit. With VRX closing at $87.45, the trade has a 25.67% cushion to the downside and an upside cushion of 25.78%.

The maximum gain on the trade is the total net credit received of $1.95, while the maximum risk is $3.05 per spread. Return on risk is 63.9%.

I would look to close out the entire trade on a meaningful break through either the $70 support level or the $110 resistance level.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

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Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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