Allergan (AGN) has been involved in a couple of take-over dramas over the last few years. First in 2014 avoiding what would have been nearly certain death warding off Valeant (VRX) and agreeing to be bought by Actavis (keeping their name, deal closed Mar 2015). In late 2014, Pfizer and AGN agreed to a $160 billion merger, only to both agree to scrap the deal in April after the U.S. tax authorities talked tough about blocking tax inversions deals like the PFE/AGN deal. Deal or no deal, AGN’s bankers made out. Yet the stock has yet to recover from the April deal break, and is trading about 10% higher than the initial Actavis purchase offer of $219, but down 25% on the year, and down 30% from its all time highs made last year:
So AGN is not usually a name with me, but there was a fairly chunky trade in Jan17 expiration that caught my eye around 2:30 pm. When the stock was trading $236 there was a buyer of 11,000 of the Jan17 235 / 280 call spreads paying $5.05 vs selling 231,000 shares on a 21 delta.
Let me break this down for a second. There are a couple reasons why a buyer of this spread might have traded this call spread delta neutral. First, it could be stock replacement, meaning the trader wanted to swap out of their entire or partial long stock position. Second, possibly the trader wanted to own this call spread, but the dealer who was willing to sell the call spread wanted to do so delta neutral to reduce the risk of hedging the position. In this scenario the trader with an eye to being long the call spread would likely just buy back the shares that they are short vs the spread, or continue to trade the position on a delta neutral basis… as the stock goes down they buy back the short deltas with stock, or as it goes up sell more to match the deltas gained lower, this way scalping the short term movement, while leaving upside exposure with the spread.
I’ll offer our usual disclaimer when detailing unusual options activity. With out intimate knowledge of the trade, or the trader’s intention it is impossible to make an intelligent inducement of said activity as it hard to know what the options position may be against. But it is always interesting to try to help gauge sentiment. this trade is large for AGN with today’s call volume about 10% of the existing call open interest, so from where we sit it was worth taking another look.
Oh and one more thing, given the poor relative performance to the broad market and its group, and the long term technical set up, it might behoove bulls to define risk as M&A may be off the table given the regulatory environment.
The five year chart shows the April break as a significant technical event as it is a gap below the long term uptrend, with near term resistance at $260, the break-even on the options portion of the trade: