There is no question about it. Valeant Pharmaceuticals International, Inc is one of the most hated stocks ever. Why is it so hated?
There are a lot of reasons why a stock can be so universally hated. The street might not like the CEO or the company may have very strict working regulations. But above all else, stocks can be hated more than others because of the amount of money they lose for investors. That much is fairly obvious.
VRX has been in the news for a long time now ever since Bill Ackman of Pershing Square became an activist for the company, shooting its stock price up towards $300 a share before crashing and burning down to almost single digits.
But because Valeant is so hated and so beaten down it provides a very nice buying opportunity for us and we feel the best way to gain exposure would be through VRX options.
Anyone following markets will know about Bill Ackman’s involvement in the company and his subsequent fall from grace from his investment in Valeant.
One of the major problems with the hedge fund industry and specifically hedge fund activists is that there is a major fear of missing out. If Bill Ackman is seen all over the news touting his profits from his investment in Valeant, investors of every fund on the street are going to be asking their money managers why they do not have the same position. This causes everyone to pile in and creates a hedge fund hotel or a stock that is predominately held by hedge funds.
There have been some ugly cases line SunEdison, which is currently bankrupt, but none worse than Valeant.
This type of catastrophic decline in stock price led to Mr. Ackman lose nearly four billion dollars in realized losses.
Regardless of how much money investors lost here, going from about $300 per share to around $10 per share created a tremendous opportunity for us. Again, we feel the absolute best way to capitalize on this would be via VRX options.
VRX Options for Big Opportunity
Options are always better than stock because they allow you to define your risk and give you much better chances to make money. But before we talk about the types of trades we would like to make with VRX options, we must first see if they are liquid enough for our money. Illiquid markets would make us have to take an immediate loss for entering a trade and we will not be doing that.
For starters, let’s see if there is enough options volume here.
Absolutely there is enough options volume. Anything over a few thousand would be acceptable so over 100,000 passes our test. If there is this much volume we assume there is enough demand for not just monthly but also weekly options.
You got it. Monthly and weekly options due to the demand for VRX options. If there was no demand for weekly options they would not be available.
All of this is great, but when it comes down to it, are the bid/ask spreads only a few pennies wide at the most? If this is not the case we must walk away.
Fortunately for us, they have super tight bid/ask spreads. This allows us to have confidence that we are going to be filled at fair value or mid price. We can trade in and out of these any day of the week.
But while institutions have gotten absolutely killed in VRX, are there still any institutions involved? The way we would know that is if there are thousands of open interest contracts. Open interest is the amount of outstanding options contracts for a strike price at a given time. Let’s check them out.
Which VRX Options Trades Are We Looking For?
We know that VRX options are liquid enough for us to trade. At the same time, the low stock price (currently $11.03) allows us to trade uncovered options for a very low margin requirement. Right now the best trade for us would be the sell the April 17 $10 puts for $0.38. While we only collect $38 for selling this put, our margin requirement is only $200 so if this trade ended up being a winner it would be a 19% return on our money in just 34 days time. Not bad.
Wrapping It Up
VRX options are liquid enough for anyone to trade. Because VRX is absolutely on the low end of its range, we recommend selling puts to play for an upside move. These give ourselves a little room for error and also require very low amounts of margin to give us a great return on our money.