November 10, 2015 / 7:14 PM / 3 years ago

Valeant options bet sours as shares continue to slide

NEW YORK, Nov 10 (Reuters) - A large bet on Valeant Pharmaceuticals International Inc’s options looks like it will leave a $95 million hole in the wallet for the trader who took the position last month, as the drugmaker’s shares continue their slide.

On Oct. 5, about two weeks before short seller Citron Research raised questions about Valeant’s distribution relationships, a trader opened a large position in Valeant’s options.

The trader sold 19,205 put options with a strike price of $145, set to expire on Nov. 20. At the same time, 16,468 calls at the $190 strike with the same expiration were sold. In all, the trader took in about $25 million in premium.

This trade - known as a strangle, as it is a bet on shares remaining within a range, in this case $145 to $190, by Nov. 20 - has not worked out. Since that day, when shares were at $170, the stock has halved in value.

A seller of a call takes on the obligation to sell shares of a company at a fixed price, called the strike, by a certain date in the future. A put seller takes on the obligation to buy shares.

Since then, Citron’s Oct 21 report, in which the short seller likened Valeant to Enron, and subsequent revelations from the company about its relationship with specialty pharmacy Philidor RX Services, have hit Valeant’s shares hard.

U.S.-listed shares of Valeant are down about 40 percent for the year. On Tuesday, the shares were last up 28 cents to $85.69.

The massive slide in the shares has taken a toll on this position. On Monday, 9,600 of the November $145 put contracts were closed at a loss of about $53 million.

Half of the position in puts, about 9,600 contracts, still remains open. Exiting the position today would result in a loss of about $95 million on the entire trade.

“The closing of the position indicates that the trader has little hope of a recovery and probably fears further losses if shares drop further,” Trade Alert options analyst Fred Ruffy said.

Looking at the size of the trade, it was likely done by a big institution, possibly a large shareholder, Ruffy said.

Cutting ties with Philidor will hurt Valeant’s dermatology business in the short term, Chief Executive Mike Pearson said on Tuesday. (Reporting by Saqib Iqbal Ahmed)

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