Stock pullbacks, options opportunities

12/09/20
  • Biotech stock RCKT in pullback mode after 257% rally to Nov. high
  • Options IV jumped amid 8%, three-day pullback
  • Bullish traders may favor puts over calls

Yesterday Rocket Pharmaceuticals’ (RCKT) landed on two LiveAction scans for big implied volatility (IV) increases, with overall IV up nearly 50% over the past five days, and IV in the January options running 29% above the 30-day average:

Chart 1: Rocket Pharmaceuticals (RCKT) implied volatility, 12/8/20. Options implied volatility chart. IV above average.

Source: Power E*TRADE


Options traders know high IV often translates into higher options premiums, which means in the right circumstances, IV surges can present opportunities to sell options at potentially inflated prices (that whole buy-low, sell-high thing).

In these situations, options traders who take a completely neutral view on direction of the underlying stock may try to capture a reversion to lower IV levels by selling a strangle or straddle. Others may choose to sell options based on their outlook for the stock: A bearish trader would sell calls, while a bull would sell puts. Some of these traders may sell puts simply to collect premium in anticipation of a rebound in the stock, but others may want to collect the premium and take a position in the stock—either way, it’s a bullish approach.

What may traders be seeing in RCKT’s recent price action? Rocket, a biotech company that focuses on genetic therapies for pediatric diseases, has only in the past couple of months broken out of a trading range (roughly $11 to $26) that bottled up prices for two years. The stock’s low in March marked a return to that range low, after which the stock more than tripled to its November 19 close of $34.68:

Chart 2: Rocket Pharmaceuticals (RCKT), 3/17/20–12/8/20. Rocket Pharmaceuticals (RCKT) price chart. IV jumped as stock pulled back.

Source: Power E*TRADE


The chart also shows the stock dropped 5% last Friday and was down nearly 8% intraday yesterday—a price move that dropped the stock more than 30% below its average Street analyst target of $45.50,1 and pumped up those put options premiums in the process.

The type of pullback RCKT has experienced over the past three days doesn’t qualify as unusual—the stock has made a dozen other moves of this size or larger during its rally off the March lows (most recently on November 24)2—but it remains to be seen if traders will treat this one as a buying opportunity as they have almost all the others.

Either way, when IV spikes, traders know to be on the watch for potentially overpriced options.

Market Mover Update: QuantumScape (QS)—formerly known as Kensington Capital Acquisition Corp. (KCAC) before a reverse merger—jumped more than 30% yesterday to a new record high. Both Dynatrace (DT) and nCino (NCNO) added on to their recent breakouts (see “IPOs in the spotlight”).

Today’s numbers (all times ET): Mortgage Applications (7 a.m.), JOLTS (10 a.m.), Preliminary Wholesale Inventories (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Adobe (ADBE), Campbell Soup (CPB), RH (RH).

 

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1 TipRanks. Rocket Pharmaceuticals Stock Forecast & Price Targets. 12/8/20.

2 Based on daily Rocket Pharmaceuticals (RCKT) price data, 3/19/20 – 12/8/20. Reflects a day with a low 8% or more below the close of the day three days prior, where that day also close above the prior day’s close. Supporting document available upon request.

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