Investors in Reata Pharmaceuticals, Inc. RETA need to pay close attention to the stock based on moves in the options market lately. That is because the Dec 20, 2019 $40.00 Put had some of the highest implied volatility of all equity options today.
What is Implied Volatility?
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell-off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
What do the Analysts Think?
Clearly, options traders are pricing in a big move for Reata Pharmaceuticals shares, but what is the fundamental picture for the company? Currently, Reata Pharmaceuticals is a Zacks Rank #3 (Hold) in the Medical – Biomedical and Genetics industry that ranks in the Top 31% of our Zacks Industry Rank. Over the last 60 days, two analysts have increased their earnings estimates for the current quarter, while one has dropped the estimate. The net effect has narrowed our Zacks Consensus Estimate for the current quarter from a loss of $1.21 per share to a loss of $1.19 in that period.
Given the way analysts feel about Reata Pharmaceuticals right now, this huge implied volatility could mean there’s a trade developing. Oftentimes, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
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