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Why $2.7M In Opko Put Buying May Not Be As Bearish As It Seems

Wayne Duggan

Opko Health Inc. (NASDAQ: OPKO) shares are down 35 percent year-to-date, and the company’s first-quarter earnings report suggests management still hasn’t found a way to stop the company’s revenue declines.

There were a series of large bearish Opko options trades over the past two days, but the unusual option activity may not be as bearish as it seems.

The Trades

On Tuesday and Wednesday morning, Benzinga Pro subscribers received a series of options alerts related to Opko.

The first batch of alerts came during roughly a two-hour stretch starting at 11:15 a.m. on Tuesday. In a series of nine different trades, the trader purchased a total of 5,500 put options at a $5 strike price that expire on Jan. 15, 2021. The puts were purchased at the ask price of $3.201 and represent a $1.76 million bearish bet at a break-even price of $1.799. The price suggests another 7.7 percent downside for Opko over the next 19 months.

On Wednesday morning, the same trader likely returned, making another batch of Opko bets. In a series of six different trades, the trader purchased a total of 3,300 put options at a $5 strike price that expire on Jan. 17, 2020. The puts were purchased at the ask price of $3.101 and represent a $1.01 million bearish bet at a break-even price of $1.899. The price suggests 2.6 percent downside for Opko over the next seven months.

The batches of bearish trades represent an aggregate $2.77 million bet that Opko shares won't be bouncing back anytime soon.

Options Insight

Many stock traders watch the options market daily to gain insight into to what options traders are thinking. Even if they aren’t trading options themselves, stock traders stay on the lookout for unusual option trading activity.

Options traders are typically seen as more advanced than the average stock trader given the sophistication of the options market. The larger the order, the more traders pay attention to what could be an institution or wealthy individual or industry insider with unique insight into a stock.

Institutional Hedge?

Before Opko bears get too concerned about the large bearish bets, there may be a caveat. Given the relatively large $2.77 million size of the two positions and the manner in which the trades were executed, there’s a good chance the puts represent a hedge on a large bullish stock position.

Stock traders often use the options market to hedge larger stock positions. It can sometimes be difficult to determine if a large option trade represents a trader’s true sentiment toward the underlying stock, but there are clues to watch for. In the case of Opko, the size of the $2.77 million aggregate position and the fact that it was broken into 16 small trades is a sign that it could be a hedge. Institutions often break large orders into many small orders so they don’t draw attention to their trading activity.

If an institution is responsible for the trading activity in Opko options, they're likely buying insurance against a much larger bet that the company and its stock will get back on track at some point within the next two years.

Opko's stock traded around $2.03 per share at time of publication.

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