On Friday’s Options Action on CNBC we got a question from a viewer about whether or not it was two late to buy puts in Valeant (VRX)? Well, this is obviously a pretty complicated case, lotta ins, lotta outs, lotta what have-yous, with the stock down nearly 90% from its all time highs made last summer. Options market makers generally over price event risk, as opposed to being caught off guard, I think its safe to say they are being less than Valiant in VRX, taking few chances.
VRX is obviously a very special situation, a comedy of errors and some who think at the very least is corporate incompetence, with some who feel there has been flat-out fraud. The prices of options in shares of VRX would suggest that there are a lot of investors who think there is a strong potential for much lower lows in the stock, or those merely buying protection bidding prices up. With the stock trading $30 as I write, the January 2017 30 straddle (the call premium + the put premium) is offered at about $24, or about 80% of the stock’s value. If you bought that, and thus the current implied move in the stock between now and January 2017 expiration, you would need a move below $6, or above $54 to make money on January expiration.
So you want to buy puts in VRX? Well if good luck with the at the money Jan put at 40% of the stock’s value. The stock remains a no touch in my opinion. With the news this morning that Bill Ackman has taken a seat on the board, and booted VRX’s CEO, I suspect it would be very hard for his firm to sell any portion of their 21 million share stake, but he could be very likely selling puts to buy calls or call spreads (a strategy he has employed in the past), which at some point could be vol dampening, making long premium directional strategies nearly impossible to make money, with 30 day at the money implied volatility at 180%: