Pharmaceutical company Bausch Health Companies (BHC) has dropped nearly 40 percent over the past year. One trader sees a further decline in the coming months.
That’s based on the July $8 puts. With 63 days until expiration, 10,001 contracts traded compared to a prior open interest of 121, for an 83-fold jump in volume on the trade. The buyer of the puts paid $1.08 to make the bearish bet.
Shares recently went for about $7.50, so the options are already about $0.50 in-the-money. The strike price is still well over the stock’s 52-week low of $4.00.
The company has struggled with profitability in the past year, but revenues did rise 1.4 percent. Plus, shares trade for less than 2 times earnings. While that looks cheap, the real issue is the company’s massive debt load, which is about 10 times the value of Bausch shares.
Action to take: Given the high debt load and the current interest rate environment, Bausch may have trouble paying off or restructuring its debt in the months and years ahead. That could lead to further pressures on shares, which should be avoided for the time being.
For traders, the July puts play well to a possible market downswing in the coming weeks, where heavily leveraged companies will likely fare worse, as a possible debt default could lead to a quick jump in interest rates in the U.S. Look for mid-double-digit returns or better here.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.