Skip to main content

Morning Update

Yesterday Sanofi-Aventis reported a fourth quarter earnings miss and said EPS would be flat to down 5% in 2013. This caused the stock to gap down about 5% and close near that level. The news was followed by unusually high option trading, especially on the put side. The biggest trade of the day was the purchase of 500 June 42 calls for $1.50 with the stock at 44.86. This is a bearish bet that the stock will be below 40.50, 10% lower, at June expiration.

Sanofi has been one of the best performing stocks in the pharma industry, up about 25% over the last 12 months. The reason for Sanofi’s pessimistic outlook is a slew of patent expirations early this year. The most significant is the expiration of their patent for Plaviks, one of the top selling prescription drugs worldwide. Though the near term outlook is nothing to get excited about, Sanofi looks prepared to return to growth in late 2013 and beyond.

The company has been focused on building a pipeline of drugs that focus on emerging markets, vaccines, over the counter treatments, animal health, and generics. Some of their most promising products called biologics, which are proteins like antibodies and insulin, and have lower failure rates than other drugs. Sanofi’s pipeline in general has been receiving above average approval rates, with Lyxumia receiving approval from the European Commission yesterday.

Sanofi’s major patent expirations are now behind them but they do not have many of their new drugs in production yet. This gap, which could last the better part of 2013, could take a toll on the company’s stock price and is the reason this trader was buying puts. However, the overall outlook for Sanofi is positive and any dips could be buying opportunities. For anyone long the stock I like the idea of hedging with a June put like this trader did, and financing the purchase with the sale of a longer dated put sale at a level you are willing to buy the stock. This type of position will protect a stock position from losses if the stock sells of and also lock in a favorable buy price should the stock dip enough.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…