Forest Laboratories Options (FRX): Unusual Trading Activity
Options in pharmaceutical giant Forest Laboratories (FRX) started to light up our tracking system late yesterday.
Forest Labs is hovering at the top of its trading range, and at least one investor is looking for a rally to ensue. In fact, options activity in FRX over the last week has been about 3 times more than average.
What’s going on?
The company’s getting ready to release earnings on July 16, 2012.
And with volatility on a sharp decline lately, option traders are starting to position themselves early. You see, the lower the volatility, the less expensive options cost. As a result, large option traders can pick up big blocks at cheap prices.
And one option trader clearly wants to take advantage of the situation.
Just before the close yesterday, our radar picked up a block trade of 1,500 contracts of the FRX July $34 call options. They traded at an average price of a mere $0.15 a piece.
With the stock closing the day at $34.55 a share, this is certainly a speculative play. However, this trade has nearly five weeks until expiration, plus an earnings announcement in between.
So, even though it’s a long shot, it could definitely wind up paying off in a big way.
But why trade a lesser known name?
If you don’t already know, Forest Labs is a pharmaceutical company focused on in-licensing drugs for development.
The company has a strong focus on central nervous system drugs, including antidepressant Viibryd, Alzheimer’s drug Namenda, and fibromyalgia drug Savella.
In addition, FRX predominantly sells drugs in the United States while maintaining a small presence overseas.
Now, is this trader out of his mind by hoping for a rally in Forest?
The short answer… I don’t think so.
Here’s why…
The company’s Alzheimer’s drug Namenda is one of only two drugs approved to treat this deadly disease. And Forest is expected to have a semi-monopoly on the drug over the next couple of years. You see, competitor clinical trials on new Alzheimer’s drugs have largely failed.
What’s more, Big Pharma has been exiting the primary-care drug business in order to focus on specialty disease drugs. This trend has lessened competition in the primary-care markets and is potentially supplying Forest with drugs bigger companies no longer want to pursue.
Lastly, FRX has a rock solid balance sheet with no debt and a ton of cash. And in this market, a strong financial position provides a real competitive edge.
Bottom line… FRX has a lot going for them. And I believe this call position is a very smart play.
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
