Unusual Options Activity: A Bearish Bet On Baxalta

| About: Shire PLC (SHPG)


There was a large bearish trade in shares of Baxalta, where someone shorted the stock and sold puts against that position.

There were bullish trades for Credit Suisse and Endo International.

The bullish trades were odd given a number of potential headwinds for Credit Suisse and Endo International.

Unusual Option Activity Briefing:

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. 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.

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Unusual Call Activity #1: Credit Suisse (NYSE:CS)

Description: Credit Suisse provides private banking, wealth management and investment banking products and services.

Option Activity: On Tuesday, there was a purchase of 14,000 $12.50 May call options for $1.30/contract. At closing that day, the stock was priced at $13.35, which means, these options were already in the money. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $13.80.

Catalyst: This options trade was a big bullish bet [$1.82 million] on Credit Suisse because on the day these options were purchased the stock had fallen significantly because of $1 billion in write-downs. In addition, the write-down was accompanied by the information that the CEO said:

"He and other senior bank officials were unaware of the size of the positions behind the write-downs but that no trading limits had been breached or trades concealed." [ Reuters Article]

This brings up questions about the internal controls and risk management process at Credit Suisse. This large trade seems even odder given the information about the management not knowing what risk they have on their books. There could be more investments that could be written down or the majority of the write-down's are over and the worst could be priced in which would make this trade make more sense.

Unusual Call Activity #2: Endo International (NASDAQ:ENDP)

Description: Endo International is a specialty healthcare company focusing on the development manufacturing and distribution of pharmaceuticals.

Option Activity: On Thursday, there was a purchase of a January 2017 call spread. The buyer purchased 5,000 January 2017 $35 call options for $4.70/contract and sold 5,000 January 2017 $50 calls for $1.00/contract. At closing that day, the stock was priced at $29.07, which means, if the stock reaches the strike price purchased, the common stock has a potential upside of 20.40%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $38.70.

Catalyst: Endo International, like many other specialty drug makers and inversion creations have fallen significantly over the past year because of drug pricing issues and issues with inversion related companies. This options trade was a $1.85 million bet that the worst is over for Endo, and shares will appreciate significantly for the rest of 2016. Like the Credit Suisse trade above, this trade was particularly odd given the potential risks going forward. First, in late March, shares of Endo fell because the FDA approved a generic version of an anti-inflammatory medication for the treatment of arthritis pain that accounts for 6% of Endo's revenue. In addition, at the end of March the FTC filed a complaint in court that alleges Endo paid Impax Laboratories (NASDAQ:IPXL) and Watson Laboratories, to delay the launches of their versions of two products that Endo manufactured. These items being known by the market could be a "sell on the news" event and shares given their large decline over the last year could rebound higher.

Unusual Put Activity #1: Baxalta (NYSE:BXLT)

Description: Baxalta develops and markets of biopharmaceuticals for the treatment of hemophilia, bleeding disorders, immune deficiencies as well as many other treatment areas.

Option Activity: On Wednesday, there was a sell/write options trade in Baxalta, where someone sold the common stock and simultaneously sold 10,000 June $35 put options for $2.30/contract. At closing that day, the stock was priced at $40.65, which means if the option seller holds the options all the way to expiration, and BXLT is at or below $35, 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 $42.95.

Catalyst: The biggest catalyst for Baxalta is the closing of their deal to be acquired by Shire (NASDAQ:SHPG). This was a very large bearish bet [$2.3 million] that shares of Baxalta would fall, which I believe was brought on by the news that the Pfizer (NYSE:PFE)/Allergan (NYSE:AGN) deal was terminated because of new rules by the treasury. Shire even put out a press release stating the proposed combination with Baxalta was on Track to Close in Mid-2016 and anticipates the Baxalta transaction will proceed as originally announced. Baxalta shareholders will receive 0.1482 shares of Shire and $18 cash, which means the deal price for each share of Baxalta, based on the $179.95 price of Shire, is $44.67. This is 11.81% above the current share price for Baxalta. Given this large discount to the deal price and the fact that Shire had to issue a statement saying the deal was still on track given the new treasury rules, there could be further potential downside in shares of Baxalta.

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.