Traders Place Short-Term Bearish Bets as Merck Retreats

Schaeffer's Investment Research
  DEC 20, 2012 3:15 PM

MRK's December 42 put is in focus today.

 


Pharmaceutical concern Merck & Co., Inc. (NYSE:MRK) is down about 2.6% in today's session, and one group of short-term bearish speculators is betting on the stock to continue its descent through tomorrow's close. Of the roughly 13,000 puts traded today, more than 2,000 have crossed at the December 42 strike. Nearly all of these have changed hands at the ask price, implied volatility was last seen 1.6 percentage points higher, and volume is outstripping open interest -- hinting at the initiation of new long positions.

By buying these puts to open for a volume-weighted average price (VWAP) of $0.42, traders expect MRK to fall below the $41.58 mark (the strike price minus the average net debit paid) by the sound of Friday's closing bell. This breakeven level is a 2.2% drop from the stock's current price.

This bearish bias by short-term speculators isn't anything new, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.49. This ratio ranks in the 98th percentile of its annual range, suggesting traders have rarely been more put-heavy toward options expiring in the next three months. Echoing this is MRK's front-month gamma-weighted SOIR of 2.12, which shows that near-the-money put open interest more than doubles call open interest among December-dated options.

On the charts, MRK is sporting a nearly 13% year-to-date gain. However, the stock has backpedaled around 11.4% since tagging an annual high of $48 on October 18. As touched upon, the equity is wallowing in the red today, after the company's cholesterol drug Tredaptive failed to achieve positive results in a recent patient study. MRK was hit with a double-dose of price-target cuts from Bernstein and Barclays as a result, which is only adding to the day's dismal price action.

As of 2 p.m. EST, MRK was churning near $42.53.

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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