Options traders are getting busy with a U.K. stock they have rarely paid attention to.
Volume in GlaxoSmithKline Plc contracts surged to the highest level since 2007 this month, with traders paying record prices for bullish options relative to bearish ones. All that after the stock lost $11 billion in value over two months.
Options have become the tool of choice for speculators as analysts flagged the company as a potential acquisition for Pfizer Inc. As deal chatter increases, so does optimism that Glaxo will give in to pressure to shake up management.
“A lot of this is down to rumors about a merger with Pfizer,” said Kari Olsen, a sales trader at Tavira Monaco Sam. “There is also talk that if the CEO does go, the stock can spike up some 10 percent on the back of people thinking that the company can then start restructuring and sell some assets.”
Almost 800 Glaxo options changed hands on average each day this month. That’s 17 percent more than in April and compares with an average of about 300 contracts daily in the past two years. Calls that profit with a 9.6 percent jump by December are the most owned of all. The stock lost 11 percent since its April high.
Chief Executive Officer Andrew Witty is struggling to revive revenue growth lagging behind competitors. U.S sales have been sluggish, investors have criticized the company’s drug pipeline, and a bribery scandal in China led to a fine of 297 million pounds ($455 million). With Glaxo’s new chairman saying this month he wants to retain Witty, speculation is growing that a takeover is what would boost the shares.
Purchasing Glaxo would benefit Pfizer, according to a Deutsche Bank AG note last week. The U.S. drugmaker, which failed to purchase AstraZeneca Plc last year, hasn’t announced a bid for London-based Glaxo or indicated an interest. Analysts also mentioned Shire Plc and Actavis Plc as potential targets.
The stock climbed 0.5 percent at 10:52 a.m. in London.
Spokespeople for Glaxo and Pfizer declined to comment on the options trading.
For Ben Kelly, an event-driven analyst at Louis Capital Markets, a Pfizer-Glaxo merger is unlikely for many of the reasons that the pursuit of AstraZeneca failed, including potential changes to U.S. tax laws making inversion deals less appealing. Glaxo also has a significant chunk of its workforce in the U.K., where the government would seek assurances regarding job cuts.
“Glaxo is a U.K. national champion -- a bid for the company would cause a rehash of all that political and nationalistic furor,” Kelly said. “There would also be political pressure against a deal in the U.S. as it’s very clear there would be a strong tax-inversion rationale, and we have elections coming up there next year.”
Using options might be the safest way to play a rebound in Glaxo shares, which are among May’s worst-performing European health-care stocks, according to Tavira Monaco’s Olsen. The number of Glaxo calls outstanding has almost doubled since the March expiration, compared with a 50 percent growth in puts.
“Glaxo has been quite weak lately,” Olsen said. “Although going outright long the stock may still be too risky for some investors, using options to play any upside on Glaxo makes sense. You don’t have too much to lose.”