Who let the dogs out?
02/21/19

●Option open interest in ELAN more than 1,600% of average yesterday

●Company is a spinoff from pharma giant Eli Lilly

●Stock has consolidated since releasing earnings Feb. 6


 

What’s that noise? Options traders barking up a storm, that’s what.

Yesterday morning options open interest—the number of new options positions being opened—in Elanco Animal Health (ELAN) was running more than 16 times its average level, putting it at the top of a Power E*TRADE LiveAction scan:

Live Action scan. ELAN options open interest. 16x average options open interest.

Source: Power E*TRADE


What’s up—earnings, a merger or buyout, new product release?

None of the above.

In fact, while such heavy options activity may naturally lead traders to expect an equally dramatic move on a stock’s price chart, yesterday ELAN was in the process of extending the consolidation that began shortly after it released earnings on February 6:

Live Action scan. ELAN options open inElanco Animal Health (ELAN), 9/20/18–2/20/19. Elanco Animal Health (ELAN) price chart. Stock consolidation amid options activity.

Source: Power E*TRADE


That low (around $28) on earnings day happens to be the stock’s all-time low—the chart shows ELAN’s entire price history. Elanco is an animal-health company—basically, think “big pharma for pets and livestock”—spun off by Eli Lilly (LLY) last fall.

Given the size of the animal pharmaceutical market—estimated at $45 billion globally in 20181—and the synergy of developing treatments for we homo sapiens and our animal friends (yes, there are diabetes and cholesterol meds for pets), it was a natural fit for existing pharma giants: Another high-profile animal health company, Zoetis (ZTS), was a spinoff of Pfizer in 2013, while Merck (MRK) still has its animal business in-house.

Getting back to ELAN, yesterday’s open interest increase wasn’t the only unusual options activity to hit the radar recently. Last Friday, for example, ELAN March 15 $40 put options had exceptionally high implied volatility (IV).2 Because IV represents the market’s estimate of future volatility, one interpretation of this development is that some options traders were anticipating a big move in the stock. (Implied volatility in March ELAN options was around 48% yesterday, seven percentage points above the 30-day average of 41%.)

Also, this options activity hasn’t occurred in a vacuum. Although Eli Lilly spun off ELAN last September, it held on to most of its shares, and news emerged two weeks ago that it would unload its remaining stock.3 It’s impossible to know how long it will take LLY to finish the job (or if they already have), but some traders may be eyeing the potential for a stock rebound once the headwind of this stock sale is removed.

A stock with decreasing price volatility, but lots of options action and higher-than-average implied volatility…

Many traders will be watching to see what gives.

Market Mover Update: Crude oil's jump above $57/barrel yesterday took many oil stocks along for the ride. April gold futures (GCJ9) rallied topped $1,350/ounce yesterday before pulling back—the highest the market has been in 10 months. Verizon (VZ) rallied again yesterday despite some weakness in the communication services sector. Dollar Tree (DLTR) continued to grind higher, pushing above $100 for the first time since last April, which dropped the price of the March $87.50 put options more than 35% since February 5 (see “Discount store, options mark-up”).

Today’s numbers (all times ET): European Central Bank (ECB) minutes (7:30 a.m.), Durable Goods Orders (8:30 a.m.), Existing Home Sales (10 a.m.), Leading Indicators (10 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Domino's Pizza (DPZ), Newmont Mining (NEM), Wendy's (WEN), Baidu.com (BIDU), BioMarin Pharm (BMRN), Dropbox (DBX), Exact Sciences (EXAS), First Solar (FSLR), Hewlett Packard Enterprise (HPE), Intuit (INTU), iQIYI (IQ), Kraft Heinz (KHC), Roku (ROKU), Scientific Games (SGMS).

 

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1 Grand View Research. Animal Health Market Size, Share & Trends Analysis Report By Animal Type, By Product, By Distribution Channel (Retail, E-commerce, Hospitals & Clinics), By End Use, And Segment Forecasts, 2019 - 2026. February 2019.

2 Zacks Equity Research. Do Options Traders Know Something About Elanco Health (ELAN) Stock We Don't? 2/15/19.

3 Barron’s. Eli Lilly to Unload Its Remaining Stock in Elanco Animal Health. 2/8/19.