Unusual Option Activity Briefing: A Very Bullish Bet On ZIOPHARM

| About: ZIOPHARM Oncology, (ZIOP)

Summary

This week there was a very bullish bet on ZIOPHARM Oncology.

There was a bearish options trade on Cigna after they gave weak guidance.

There was a bearish trade on acquisition target Baker Hughes.

Unusual Option Activity Briefing: A very bullish bet on ZIOPHARM Oncology

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During the week, I look for unusual options activity and at the end of the week; I highlight the most compelling options activity that occurred. The way I determine whether options activity is unusual is by looking for outsized trades in comparison to existing open interest for the strike purchased. For example, my first selection below Ziopharm had over 17,000 contracts purchased when open interest for that strike was just over 1,000 contracts. I will be looking at potential catalysts that could drive the stocks I cover upward or downward towards the strike prices that the unusual options activity occurred.

Unusual Call Activity #1: ZIOPHARM Oncology, Inc. (NASDAQ:ZIOP)

Description: ZIOPHARM Oncology is engaged in development and commercialization of cancer therapies.

Option Activity: On Tuesday, there was a purchase of 17,405 $8 March call options for $0.25/contract. At closing that day, the stock was priced at $5.46, which means, if the stock reaches the strike price, the common stock has a potential upside of 46.52%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $8.25.

Action Since Trade: Since this trade was initiated, the share price has increased from $5.46 to $5.50 at the time of writing this and with that increase, the potential common stock upside has decreased from 46.52% to 45.45%, if the stock were to reach the $8 strike price by expiration.

Catalyst: Ziopharm reports earnings on February 24 and while the earnings themselves will most likely be a non-event, any updates on progress of their clinical trials will most likely send the stock higher if the information is perceived as positive. I looked everywhere I could find and found no major FDA catalysts or trial data release catalysts that are occurring before March expiration, which makes this massive options trade odd. With a potential common stock upside of over 45%, there has to be some data or something major that will trigger a short-squeeze or an acquisition to get to the 45% upside. Currently over 36% of the float for Ziopharm is short, which means if good data is released or Ziopharm is acquired that would send the stock upward significantly. It will be interesting to see if a major event happens by the March expiration.

Unusual Call Activity #2: Abiomed (NASDAQ:ABMD)

Description: Abiomed manufactures cardiac support, recovery, and replacement devices.

Option Activity: On Tuesday, there was a purchase of a June call spread. The buyer purchased 2,000 June $80 call options for $7.60/contract and sold 2,000 June $105 calls for $1.45/ contract. At closing that day, the stock was priced at $71.16, which means, if the stock reaches the strike price purchased, the common stock has a potential upside of 12.42%. If the option spread buyer holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $86.15.

Action Since Trade: Since this trade was initiated, the share price has increased from $71.16 to $72.77 at the time of writing this and with that increase, the potential common stock upside has decreased from 12.42% to 9.94%, if the stock were to reach the $80 strike price by expiration.

Catalyst: Abiomed just reported strong earnings where they beat revenue and earnings estimates. However, the stock fell significantly a couple days after this earnings report and that is where the call spread was purchased after the significant decline. The June calls purchased will include the earnings report for the current quarter and the $80 level is important because that is where the stock broke out above in August 2015. This is shown in the chart below where the $80 was the breakout point in 2015, and was close to the level where shares gaped down from last week.

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[Chart from ThinkorSwim]

Unusual Put Activity #1: Cigna (NYSE:CI)

Description: Cigna is one of the largest health insurers in the United States and Anthem (NYSE:ANTM) targeted Cigna last year for an acquisition.

Option Activity: On Tuesday, there was a purchase of a January 2017 put spread. The buyer purchased 5,250 January 2017 $125 put options for $15.50/contract and sold 5,250 January 2017 $105 puts for $7.00/ contract. At closing that day, the stock was priced at $128.18, which means, if the stock reaches the strike price purchased, the common stock has a potential downside of 2.48%. If the option spread buyer holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $116.15.

Catalyst: Because the options do not expire until January 2017, there are a number of earnings catalysts that will occur during that period. This trade was made after Cigna just reported earnings and provided guidance of $8.85-$9.25, which was below the consensus of $9.30. The biggest catalyst however, is the potential acquisition by Anthem. With the current cash consideration of the deal plus the shares of Anthem holders of Cigna would receive, the deal is currently valued at over $165/share. With the stock already trading at a significant discount to this price and this bearish bet, this is a signal that its deal with Cigna could be troubled. If that were the case and the deal were to fall apart, the stock would have some added downside risk, which would be beneficial to this put spread buyer as long as the price stays above $105/share. In addition, from a technical perspective, the $125 level is extremely important as you can see below; any meaningful break below this level will most likely have much more downside after doing so.

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[Chart from ThinkorSwim]

Unusual Put Activity #2: Baker Hughes (NYSE:BHI)

Description: Baker Hughes provides services for drilling of oil and gas wells, completion and production of oil and gas wells, fluids and chemicals and reservoir technology.

Option Activity: On Wednesday, there was a sell/write options trade in BHI, where someone sold the common stock and simultaneously sold 11,000 April $40 put options for $4.40/contract and at closing that day, the stock was priced at $41.51 If the option seller holds the options all the way to expiration, and BHI is still below $40, they will be obligated to purchase the stock at those levels. If held to expiration, the price needed to break-even, excluding the cost of commissions would be $45.91.

Catalyst: The only catalyst that matters for Baker Hughes right now is whether their deal with Halliburton (NYSE:HAL) gets through. With the deal delayed until no later than April 30th it is clear why this trade was made with the April options expiration. Recently the EU extended its deadline by 20 working days for HAL and BHI to come up with a plan for asset sales to be able to get the deal through. Since this trade was a sell/write, the seller sold the stock and is obligated through the options they sold to buy the stock at $40 at the time of expiration. This is a bearish trade for the prospects of the HAL/BHI deal because with the breakeven point at just under $46 this potentially signals that the deal will fall apart or if oil continues to fall the value of the deal could decline below $46/share.

Disclaimer: See here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.