Options traders still see huge risk after Valeant CEO ouster

Mon Mar 21, 2016 5:41pm EDT
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By Saqib Iqbal Ahmed

NEW YORK, March 21 (Reuters) - Options traders in U.S.-listed shares of Valeant Pharmaceuticals International Inc are bracing for more volatility, as changes to the drugmaker's management and board did little to ease uncertainty about the stock's direction.

On Monday, Valeant said that Chief Executive Michael Pearson will step down and activist investor William Ackman will take a seat on the company's board as the embattled drugmaker tries to turn the tide. The news sent its shares up as much as 17 percent to $31.58.

But that failed to assuage investors in the options market, who responded by adding to protective positions to guard against further losses. Expectations for big swings in the stock remained high.

"I would have expected some easing in volatility given the news this morning, but implied volatility is still up near the 100 percentile," said Jonah Evangelista, a trader at T3 Trading Group.

Valeant shares have been hammered in the last seven-plus months, losing more than 90 percent of their value because of scrutiny over pricing and distribution practices that has led to government investigations.

The stock's 30-day at-the-money implied volatility, a gauge of the risk of large moves in the shares, is at 158 percent, close to an all-time high, according to options analytics firm Trade Alert. Options that expire on Friday are currently pricing a move of about 10 percent in either direction by that time.

"I'm not seeing any turn in sentiment from the current options picture," Evangelista said.

The demand for puts, usually used to protect against a drop in shares, remained strong.   Continued...