A bearish bet on Valeant Pharmaceuticals International Monday afternoon turned a paper profit just hours later as the stock tanked.
A put option grants the right to sell shares of the underlying stock at a specific price, called the strike, by a certain time.
Just before 2 p.m. Eastern, an investor bought 6,178 Valeant puts with a strike price of $70 that expire Friday. Each contract cost $1.83, so the investor paid about $1.1 million for the trade when Valeant was trading at $74.71.
That’s “a pretty hefty premium, so someone is worried that it’s going to fall further,” says Fred Ruffy, an options strategist at Trade Alert.
The stock continued to slide Monday, accelerating after Valeant said it is under investigation by the Securities and Exchange Commission. The company on Sunday postponed its fourth-quarter conference call and withdrew previous financial guidance.
Shares slumped 18% to end at $65.80. Based on pricing in the options market, the investor netted a paper profit of nearly $3.1 million at Monday’s close.
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