3 Stocks Feeling The Merck Aftershocks

Hey Traders,

Undoubtedly the story of the week came on Friday, which helped break the September strain and give the markets a little bit of a boost going into the weekend …

Merck (Ticker: MRK) reported it has developed a new COVID treatment — this time, in a pill rather than an injection. 

While so far the drug has a success rate of 50% in reducing hospitalization and death in “mild” to “moderate” COVID cases, it hasn’t yet received emergency authorization from the FDA.

I expect we’ll get a final verdict on the drug sooner rather than later. In the meantime …

A Full Recovery?

This brings “reopening” trades into play — again — and specific sectors that have felt the crush of the Delta variant stand to see significant upside … again.

Or … in some cases, the MRK announcement might serve to squash some of their COVID gains.

Here’s three stocks that are feeling the aftershocks of the MRK announcements …

And where options traders think they could be headed next …

Moderna (Ticker: MRNA)

In case Moderna (Ticker: MRNA) wasn’t already having a rough few months, with rival Pfizer (Ticker: PFE) granted FDA approval, and mixed news on boosters, the MRK COVID pill announcement weighed especially heavy on the biotech.

The shares gapped down Friday, and shed more than 11% in a single trading session.

Chart courtesy StockCharts

Options traders were quick to pile on, with MRNA option volume hitting the 98th percentile of its 52-week range, and seeing 2.4 times its usual trading volume.

The largest trade to cross the tape was a lot of 1,000 January 2022 320-strike puts sold to open — but these do not necessarily indicate a bullish position, as they were tied to a block of 38,000 MRNA shares traded at $339.89, potentially a short-sell.

It’s important to always find the story behind Smart Money trades such as these, because they aren’t always what they appear to be on the surface.

A correct read on a Smart Money move can be the difference between a profitable piggyback, and a swing-and-a-miss copycat.

I have a four step process I go through when looking at Smart Money trades — find out more about them right here.

This trader isn’t the only MRNA bear, and after Friday’s trading session, put open interest now eclipsing call open interest:

However, while MRNA is definitely sensitive to perceived declines in vaccine demand, the MRK announcement may not weigh as heavily as the market seems to be expecting, if people subscribe to the philosophy that ‘an ounce of prevention is worth a pound of cure.’

Personally, however, I thought both MRNA and PFE were already trading a bit too big for their britches. I was waiting for the vaccine euphoria balloon to pop, and I think MRNA may be more fairly valued once the waters calm.

United Airlines (Ticker: UAL)

Of course, while vaccine stocks took it on the chin, plenty of other sectors were flying higher …

Like airlines.

Reopening plays are back, baby!

At least, UAL seemed to think so, with the shares up almost 8% on the day yesterday.

UAL pits were also exceptionally busy, trading 2.4 times their usual volume, though put open interest in particular is higher than usual.

The January 2022 term is by far the most popular among options traders, accounting for 268,442 contracts of call open interest, and 187,162 contracts of puts.

Within that trading term, the 80-strike, 40-strike, and 55-strike calls are the most populated among call buyers, with each having over 20,000 open contracts.

On the other side of the rope, January put open interest seems most concentrated in the 45-strike and 35-strike puts, which hold open interest of 36,000 and 33,000 contracts, respectively.

Carnival Corp. (Ticker: CCL)

Could cruise lines finally get a break?!

Carnival sure hopes so … although it’s run higher on the MRK news was perhaps a bit more muted than it would have liked:

In the pits, open interest didn’t indicate the same levels of enthusiasm as traders showed for say, airlines and vaccine stocks …

But nevertheless, there’s quite a bit of interest in cruise lines, who have so far seen an underwhelming “reopening” rally.

A trade consisting of a purchase of 2,000 contracts of January 2022 20-strike puts was the largest to cross the tape in CCL’s pits today.

But looking at the bigger picture, call options hold the upper hand, and the upcoming standard October 15 expiration is one of the most heavily populated trading terms (second only to January 2022).

October 15 calls had the heaviest trading volume of any term today, and one-third of that volume was concentrated in the October 30-strike calls, which saw more than 12,000 contracts opened.

It looks like options traders are expecting the CCL rally to pick up, and I think these shares could make a run at $30 in the weeks ahead.

Your Only Option,

Mark Sebastian

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