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Geron Plunge Doesn't Scare the Bulls

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GERN speculators are scooping up out-of-the-money calls.

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Despite plummeting into penny stock territory out of the gate, Geron Corporation (NASDAQ:GERN) calls are flying off the shelf this morning. Within the first 90 minutes of trading, the biopharmaceutical concern had already seen more than 2,000 calls change hands, compared to its average intraday volume of fewer than 35 calls.

The majority of the action has centered on the January 2.50 call, which has seen close to 1,500 contracts traded -- mostly at the ask price, suggesting they were bought. Plus, implied volatility on the out-of-the-money call was last seen more than 50 percentage points higher, hinting at fresh initiations. By purchasing the calls to open, the buyers will profit if GERN bounces back atop the $2.55 level (strike plus volume-weighted average price of $0.05) within the next couple of months.

From a broader sentiment standpoint, GERN is no stranger to near-term call traders. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.40 indicates that calls more than double puts among options with a shelf-life of three months or less. Plus, this ratio registers in the 36th percentile of its annual range, implying that short-term options players are more call-biased than usual right now.

In the front-month series, peak call open interest can be found at the out-of-the-money 2 strike, home to more than 2,800 contracts. Considering GERN hasn't traded north of $2 since mid-to-late September -- and since short interest represents nearly nine sessions' worth of pent-up buying demand, at GERN's average pace of trading -- it's possible that some of these calls represent hedges. As such, it's also possible that short sellers are behind today's run on January-dated calls, which lock in an acceptable repurchase price for the shorted shares, should GERN stage a notable rebound.

In fact, in order to topple the aforementioned breakeven level of $2.55, GERN would have to more than double from current levels. As alluded to earlier, the shares tumbled to an all-time low of $0.91 out of the gate, after the firm said it will discontinue the development of its experimental brain cancer drug, GRN1005, after a disappointing mid-stage study. Furthermore, the company said it will cut about 40% of its workforce, and announced the departure of CFO Graham Cooper.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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