Options Traders Making Big Long-Term Bets On Teva

Teva Pharmaceutical Industries Ltd TEVA shares were rocked this week after 44 different states filed a lawsuit against the company alleging Teva was among 20 different companies that conspired to manipulate and inflate drug prices.

Options traders reacted to the news and price volatility in Teva shares to place some big bets Tuesday on how the conspiracy drama will play out for the stock.

The Trades

On Tuesday morning, Benzinga Pro subscribers received several options alerts related to Teva.

The first trader purchased 1,521 call options at a $12.5 strike price that expire on Jan. 17, 2020. The calls were purchased at the ask price of $1.896 and represent a $288,381 bullish bet at a break-even price of $14.396. The price suggests another 16.1 percent upside for Teva over the next eight months.

Within an hour of the bullish trades, two additional bearish Teva trades were placed, almost certainly both by the same trader. The trader first purchased 635 Teva put options expiring on Sept. 20 at the strike price of $13. The purchase was made at the ask price of $1.61. The trader then bought an additional 3,000 put options expiring on Sept. 20 at a strike price of $17. The second trade was executed at the ask price of $4.651.

The two bearish trades represent an aggregate $1.497 million bet that the worst is yet to come for Teva.

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Even traders that stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions that may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no sure-fire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small sizes of the Teva options trades, it’s unlikely they are hedges.

Buy The Dip Or Run For The Hills?

The contradictory options market activity on Tuesday reflects the difficult outlook for Teva. The bullish option buyer is likely betting the lawsuit over price fixing will ultimately be resolved and will have little or no lasting impact on Teva’s business.

The much more aggressive bearish Teva options trader is likely betting that where there’s smoke, there’s fire. Teva may be subject to large fines and additional regulation. It could also ultimately be singled out as an example for politicians during the upcoming 2020 campaign season.

Teva's stock traded around $12.28 per share at time of publication.

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