Drug Stock With Cheap Options Sounds Bear Signal

Short-term options are pricing in low volatility expectations right now

Immunomedics, Inc. (NASDAQ:IMMU) stock topped out at an annual high of $26.99 on Sept. 4, before sliding to a 13-month low of $11.55 by mid-January. A rebound attempt was quickly rejected by the drug stock's 160-day moving average, with IMMU falling all the way back near their January bottom by early June. A bounce off here has the shares running up to their 160-day trendline once again, suggesting it could be time to bet bearishly on Immunomedics.

According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been two other times in the past three years IMMU has come within one standard deviation of its 160-day moving average after a lengthy stretch below it -- defined for this study as the stock trading below this trendline 60% of the time within the last two months, and in eight of the past 10 sessions. Following these prior signals, Immunomedics was lower one month later both times, averaging a 21-day loss of 7.7%.

Even with the stock down 40% year-over-year and stuck beneath stiff resistance, short-term options traders are unusually call-heavy toward IMMU. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.07 ranks in the lowest percentile of its annual range. Drilling down, there's a heavy accumulation of open interest at the overhead August 16 call strike, which could pressure the shares as the hedges related to these bets begin to unwind.

There's room for a round of bearish brokerage notes, too, which could create headwinds for IMMU stock. Currently, five of seven analysts maintain a "strong buy" rating on the equity, with not a single "sell" in the books. Plus, the average 12-month price target of $25.30 is a more than 63% premium to Immunomedics stock's current perch at $15.49.

Those wanting to bet bearishly on the drug stock may want to consider buying puts. IMMU's Schaeffer's Volatility Index (SVI) of 59% registers in the 10th percentile of its annual range, meaning short-term options are pricing in relatively low volatility expectations at the moment -- a key to maximizing the benefit of leverage.