Options Radar Signaling Big Bounce in Two Medical Equipment Makers

Options Hawk's Options Radar has been buzzing lately as the options market continues to explode on a volume basis. Recent action in low dollar stocks has proven ultra-profitable with E-Trade (ETFC), Regions Financial (RF), Synovus (SNV), and countless other names rebounding as this rally gets legs.

However, two relatively unknown names in the medical equipment industry showed up on Friday with very bullish action, and the technical patterns and high short interest make it evident that these 2 stocks could bounce significantly before May options expiration.

Conceptus (CPTS) and Patterson Companies (PDCO) traded 15X and 13X average call volume on Friday, respectively.

Conceptus has 21.5% of its float short, or nearly 20 days to cover, and buyers came in aggressively on wide spreads to pay the offer, with May $12.50 calls garnering the most interest among traders. Shares of the company broke out of a symmetrical triangle Friday that would imply a move to $16.40, or around 30% higher is underway, especially as stock volume also traded nearly 2x the norm. Implied volatility remained elevated near 105%, but a far cry from the 151% seen in mid-February when shares fell nearly 20% in 2 days after earnings. Conceptus makes minimally invasive medical devices for the reproduction system, such as permanent birth control for women, and earnings are scheduled for April 21st which will likely cause another 3+ standard deviation spike that will raise send option prices soaring. And this time traders are betting on a move higher in shares, which could be exacerbated by the shorts running for cover.

Patterson Companies saw a steep drop in implied volatility Friday from 50% to 39% near levels from last July. This had call buyers step in and trade 13X the average call volume, but also 9x the average put volume, with 37,000+ calls trading and just 1,182 puts, a day after 6,500 calls and 1,900 puts traded. Shares broke out past a key $21 resistance level on one of the largest volume days in recent times for the company. There is no announced earnings date for the dental and rehab medical supplier, but shares trade at just 11.6x forward earnings, and have a short ratio of 5.32. A lot of the action came from profitable April $17.5 and $20 call holders rolling positions to the same May strikes, but some new traders began taking notice and bought 639 May $22.50 calls versus open interest of 220.

Both of these stocks had very unusual call activity trading in multiple large lots, have bullish chart patterns, a high short interest, and upcoming catalysts for an explosive move.

Stryker (SYK) was another medical equipment stock that traded unusual call volume on Friday due to continued rumors that Johnson and Johnson (JNJ) is looking to pay $50 cash per share for the company. On April 9th, Varian Medical (VAR) call activity exploded on rumors that Siemens (SI) was looking to buy the company for at least $45 per share to help Siemens' new oncology platform. Becton Dickinson (BDX) and Cooper Companies (COO) have also recently been mentioned.

We could see mergers and acquisitions pick up across the sector, with both Conceptus and Patterson looking to be attractive targets as each company operates in a niche business that could add top-line growth to the larger player in the industry, another reason to own the shares of these two companies.

Disclosure: No positions at time of writing, but considering buying calls in each.

Comments

[Joe Kunkle:]

Another medical equipment stock hit Radar on 4.20:

****Zimmer Holdings (ZMH) continues a trend of bullish action in medical equipment makers where 4.4X the average call volume traded today with noticeable new positioning in May $45 calls with shares at $41.93, and the order flow was decisively bullish at the offer in multiple 750+ contract lots. ZMH shares are nearing a breakout of a bearish channel and have earnings scheduled for April 23rd, and much of the action today could be a bullish earnings, as well as a bet associated with a sympathy play on Stryker’s (SYK) earnings that were announced after the bell. ZMH is also a name that also comes up in takeover chatter with JNJ the rumored buyer. ZMH volatility remained elevated ner it’s highest levels since November at just under 60%.

Apr 20 05:32 PM

[Joe Kunkle:]

4/21/09 3:20pm****
Invacare (IVC)  very unusual with a record call volume day, albeit only 964, but 913 of May $15's trade when average volume in calls is just 37; earnings are April 23 before the open; also a seller of 20 May $15 puts; looks like someone may know something into earnings. This continues the trend of bullish action in medical equipment names, and IVC is well off August highs of $26, currently at $16.50 and near a triangle breakout above $17.50. IVC implied volatility has spiked from 52% to 67% today, very interesting.

Apr 21 03:31 PM