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Eli Lilly Bears Push Against Technical Headwinds

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LLY May 52.50 Put Draws Nearly 18,000 Contracts.

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Drug maker Eli Lilly & Co. (NYSE:LLY) saw a huge uptick in put trading on Friday, with more than six times the normal bearish volume crossing the tape than normal. Most of this action was focused in on the May 52.50 put, which saw 17,515 contracts change hands.

Volume vastly exceeded open interest and implied volume ticked higher, suggesting at least some of these puts were bought to create new positions. Open interest at this strike expanded by 7,500 contracts over the weekend. Having traded at a volume-weighted average price (VWAP) of $1.32, LLY shares need to close at $51.18 (strike minus VWAP) at expiration on May 17 for the options to break even -- a 6.7% drop from the current trading price. Anything below that means a profit for the traders -- anything above the strike price means they are out only the premium paid. (Between the breakeven price and the strike price, losses gradually diminish.)

The trades were keeping in line with recent sentiment toward the Indianapolis-based company. The Schaeffer's put/call open interest ratio (SOIR) for LLY is 1.45, and not only are puts more popular overall than calls, but that ratio is just 1 percentage point off an annual high. That means bears have been much more prevalent lately on options that are set to expire in the next three months.

But these investors could be facing some serious technical headwinds. LLY shares have been steadily climbing for the last 12 months -- ushered up the charts by their 10-week moving average -- and just this morning hit an annual high of $54.93. In addition, LLY officials said this month they have no plans to spin off their animal health division, as sector peer Pfizer Inc. (NYSE:PFE) has recently done. Still, revenues and sales have been down on many of LLY's name-brand drugs, and there is a serious division among Wall Street analysts. Currently there are five "strong buys" for LLY, but eight "holds," one "sell," and two "strong sells." If some of the more bullish analysts change their minds, that could provide the downward pressure the bearish option traders need to make this latest round of puts finish in the money.

This article by James Pilcher was originally published on Schaeffer's Investment Research.

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