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Option Traders See Gilead Sciences Running Out of Steam


GILD speculators are scooping up long-term put options.

The shares of Gilead Sciences, Inc. (NASDAQ:GILD) are bucking the broad-market trend lower this morning, touching a new all-time peak of $43.82 right out of the gate. Nevertheless, some options traders are attempting to call a top for the biotech concern, with long-term puts flying off the shelves.

Already today, GILD has seen roughly 2,800 puts cross the tape -- a 42% increase over its average intraday volume. For comparison, just over 1,300 GILD calls have exchanged. Most of the action has transpired at the January 2014 45-strike put, which has seen 1,550 contracts change hands at a volume-weighted average price (VWAP) of $5.31. The majority of the puts have crossed on the ask side, and volume has exceeded open interest at the LEAPS strike, pointing to buy-to-open activity.

By purchasing the puts to open, the buyers expect GILD to remain south of $45 through 2013. More specifically, the traders will profit if the stock retreats beneath the $39.69 level (strike minus VWAP) before January options expire. Currently, the options' delta stands at negative 0.49, or 49%, suggesting the options market is giving the puts a roughly 1-in-2 chance of moving into the money. However, even if GILD continues its quest for new highs, the most the buyers can lose is the initial premium paid for the puts.

Despite GILD's technical tenacity, though, today's appetite for puts is just more of the same. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day put/call volume ratio of 1.19 stands higher than 89% of all other readings of the past year. In other words, option buyers are initiating bearish bets at a quicker-than-usual step.

In the same vein, the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.07 ranks in the 82nd percentile of its annual range. In simpler terms, near-term options speculators are more put-biased than usual at the moment.

That skepticism is prevalent elsewhere, as well, with short interest climbing 8.1% during the past two reporting periods. In fact, these bearish bets represent a week's worth of pent-up buying demand, at GILD's average pace of trading.

At last check, the shares of GILD have pulled back from new-high territory, but remain 0.5% north of breakeven. Should the security maintain its upward momentum, a reversal in sentiment in the options pits, or a short-squeeze situation, could stoke the contrarian flames.

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

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