Near-Term Options Are a Steal on Red-Hot Valeant

The shares of Valeant Pharmaceuticals (VRX) — soon to be Bausch — have been on fire since breaching the $15 level in early March. The equity has advanced more than 65% in the past three months, and notched an annual high of $25.52 earlier today. In fact, VRX has surged 14.5% just this week — breaking north of former resistance in the $24-$24.50 range — thanks to upbeat comments from H.C. Wainwright and yesterday’s upgrade to “overweight” at Barclays, which also hiked its price target to $29 from $20. What’s more, now could be time to scoop up VRX call options, if recent history is any guide.

Although Valeant shares have been flirting with multi-year highs, the stock’s near-term options remain attractively priced. Specifically, VRX’s Schaeffer’s Volatility Index (SVI) sits at 45%, in just the 15th percentile of its annual range. This indicates short-term options are pricing in relatively low volatility expectations.

Looking back 10 years, there was just one other time at which VRX was near an annual high while simultaneously sporting an SVI in the bottom 20% of its annual range. After that instance, Valeant stock skyrocketed 31.79% the following month, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. A similar pop from the stock’s current perch at $25.29 would put VRX around $33.33.

Another reason to consider short-term options on VRX: the stock’s Schaeffer’s Volatility Scorecard (SVS) of 98 out of 100. This indicates the shares have easily exceeded options traders’ volatility expectations in the past year — a boon for would-be premium buyers.

Plus, despite the drug stock’s momentum lately, there’s still plenty of room for more analysts to upgrade VRX and drive additional gains. Currently, half of the 12 brokerage firms following the Bausch + Lomb parent maintain tepid “hold” or “strong sell” ratings.

Speculators looking to scoop up VRX calls could consider the weekly 6/22 23-strike call, which is currently asked at $2.50. Buyers of the call will profit the higher Valeant stock rallies north of $25.50 (strike plus premium paid) by the close on Friday, June 22, when the options expire. Should the shares pull back during the option’s lifetime, the most the buyers can lose is the initial premium paid.