Biovail Corp. (BVF) bearishness crosses tape due to buying


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Broad-market losses are putting pressure on shares of drug manufacturer Biovail Corp. (NYSE: BVF ) , and put volume on the tape suggests at least one investor chose to trade options to bet on downside throughout the next few months.

BVF shares have dropped more than 1%, or 19 cents, to $18.31 during midday trading on Friday without a clear news catalyst other than the broader-market weakness following the economic data released ahead of the opening bell. BVF shares dropped to a 52-week low of $12.41 in August 2009, and options action that crossed recently suggests an investor expects the stock to make new lows during the next few months.

At 12:20 p.m. EST, a block of 7,600 out-of-the-money (OTM) October 12.5 puts changed hands for 35 cents per contract. These OTM puts are home to current open interest of 162 contracts, indicating the investor most likely opened a bearish long put position. The put buyer will make money on this trade if BVF shares are trading lower than $12.15 at October options expiration (maximum profit on this trade is the strike minus the premium paid in the unlikely event that BVF shares are trading at zero at expiration). If BVF shares remain around their current level and are trading higher than the strike price, the investor loses a maximum of the premium paid, or 35 cents per contract (a total of $266,000 for this put purchase). If BVF shares are trading between the breakeven price and the strike price, the investor takes back some, but not all, of the premium paid.

Implied volatility of these longer-dated options is 59% compared to the stock's 30-day historical volatility of 63%. The puts have gained eight cents so far on the day and are trading at a 9-delta, meaning the options have climbed more than the delta level would suggest. It looks like the buying action has pushed up the price of the puts on the day.

Keep in mind that if the price of the puts appreciate with or without a drop in the stock, the investor could choose to sell back the options instead of holding them until October options expiration. You can build a visual of the risk/reward dynamics of this long put trade and other stock and option plays, open a free virtual trading account to gain access to essential trading tools.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options

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Jud Pyle

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