Market-Bending Drugs

As far as where the option activity was brewing today, we know that put activity in the financials was on the front burner, but volume in the drug and big pharma names were starting to cook at a low boil.

Pozen (POZN - commentary - Cramer's Take), the maker of pain relievers, saw option volume run at eight times the average daily volume, and implied volatility nearly doubled to 150 over the past three trading days. Pozen is set to release earnings in late April, and some brave soul took the opportunity to sell volatility by selling the May 10 put and May 15 call for a net credit of $2.40 for the strangle.

Merck (MRK - commentary - Cramer's Take) saw option traders preparing for an increase in volatility and possibly a decline in shares over the next few months.

In this case, the big notable transactions consisted of someone buying the strangles, as investors await a decision from the FDA's investigation for a possible correlation of its asthma drug to suicidal ideation in patients.

Vertex (VRTX - commentary - Cramer's Take) was a big winner, gaining over 7.5% to $19.20 on positive news regarding its cystic fibrosis drug. While option volume was 11 times the daily average and more than five calls traded for every put, most of the trading appeared to be profit-taking.

For example, the most active strike was the May 17.50 call, which traded some 1,730 contracts, but this is only a third of the prior open interest, and most of the volume was done on the bid price, suggesting liquidation. If people were initiating fresh speculative bullish positions, they would most likely use the lower cost, higher-leveraged strike, such as the $20 call.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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