Endo International Plc (ENDP) saw its stock price cut in half following an earnings report that actually beat on both the top and bottom line, but disappointed on guidance.
Being an Ireland-based company, the muddied future surrounding tax inversions that recently scuttled the Allergan Plc (AGN)-Pfizer Inc (PFE) deal likely added to the disappointment.
As a contrarian, however, I am starting to see glimmers that the lows may finally be in for ENDP stock.
The chart shows the huge gap post-earnings on May 6, but it also reflects a doji pattern from May 12. A doji is a trend reversal indicator, with the stock opening and closing at the highs of the day after making new lows intraday. This normally indicates that the selling may be washed out at these levels.
Another indicator that ENDP may be finding some footing at these levels is the comparative performance yesterday of Endo International to the overall market. With the S&P 500 down nearly 1%, shares of ENDP managed to rally over 6% to close at $15.17. This type of price action is many times a sign that the selling may be waning.
While the technical picture may show that ENDP has found a bottom, the options market certainly still shows a large amount of concern. Implied volatility (IV) is still trading at extreme levels post earnings, with a reading at 93%. This type of heightened IV level is normally a good contrarian bullish indicator.
The options market has also seen some big and unusual call volume in ENDP options, with over 16,000 contracts trading in the May 20 calls that expire this Friday. This sort of aggressive short-term call buying can also be indicative of an imminent pop in ENDP stock.
ENDP Stock Trade
With IV in ENDP at high levels, option selling strategies are favored. To position for an intermediate term bottom in ENDP stock, a short put spread makes sense to me.
Specifically, I would look to sell the June $12.50 puts and buy the June $10 puts for a 40 cent net credit or better. These options are the regular monthly options that expire June 17.
The short strike is positioned just below the May 12 intraday low of $12.56 and 17.6% below Endo’s $15.17 closing price.
The maximum gain on the trade is $40 per spread with the maximum risk being $210 per spread. Return on risk is 19%. I would look to close out the spread on a meaningful close below the $12.56 level, while hoping to let the spread expire worthless and keep the initial $40 credit if ENDP stock remains well-behaved.
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.
