Easily one of the top performers during the midweek session, shares of Rocket Pharmaceuticals (RCKT) – which specializes in curative gene therapies for diseases with high unmet needs – veritably soared, closing up nearly 39% against the prior day. Still, given the wild nature of RCKT stock, the underlying biotechnology firm has only gained about 11% for the year.
It then begs the question, which Rocket will show up moving forward? The one that can live up to its earlier promises or the iteration that has gone absolutely nowhere since making its public market debut in in early 2015? By looking at the face-value implications of its unusual stock options volume, a lay observer may come away with the impression that RCKT stock will go on a northward trajectory.
Fundamentally, it’s not an unreasonable proposition. After all, shares usually don’t just print almost 40% single-day returns on a whim. More to the point, The Motley Fool reports that Rocket’s catalyst centered on the Food and Drug Administration (FDA) signing off on its Phase II pivotal trial for a treatment for Danon disease.
A terrifying inherited condition, Danon disease often leads to death in men by age 20 and in women by age 40. Per Rocket’s press release, the disease affects between 15,000 to 30,000 patients in the U.S. and Europe. At the moment, no FDA-approved cure exists, facilitating a huge opportunity for Rocket.
Around the same time, the biotech announced a public offering of 7.8 million shares of its common stock at $16 a pop. With the money raised from the secondary offering, management should help fund the aforementioned trial.
While the general consensus is one of excitement for RCKT stock, institutional investors appear to have a different take.
RCKT Stock Presents a Possibly Deceptive Case
Following the close of the Sept. 13 session, RCKT stock represented one of the top highlights in Barchart’s screener for unusual options volume; that is, comparing the midweek session volume to the trailing one-month average metric. By this measure, RCKT hit an astounding 1,374.28%, making it the third-most unusual option for the session.
Specifically, total volume reached 18,915 contracts against open interest of 8,453 contracts. This ratio alone implies a sudden rise in demand for RCKT stock options. Transactionally, call volume hit 13,499 contracts while put volume only mustered 5,416 contracts. This pairing yielded a put/call volume ratio of 0.40, seemingly favoring the bulls. Also, the put/call open interest ratio sits at a lowly 0.13, another possible sign of optimism.
Looking at the implied volatility (IV) curve – or volatility smile – of RCKT stock, the plotline charts a rising linear trend. From the lower strike price range to the highest point, IV likewise runs from 79% to 195%. Typically, a volatility smile would be U-shaped, with traders covering risk on both extremes. In this case, traders appear to anticipate heightened activity at rising strike prices, not lower.
Given the imbalance toward call options, ordinary retail investors may be tempted to jump on RCKT stock. However, Fintel’s options flow data – which filters for big block trades likely made by institutions – presents a seemingly opposite gamble.
Yes, there was heavy activity involving call options during the Sept. 13 session. Notably, volume for the Oct 20 '23 17.50 Call hit 2,030 contracts against open interest of 5,379 while volume for the Jan 19 '24 25.00 Call reached 5,108 contracts against open interest of 115. However, these were sold calls, meaning that traders writing these contracts would benefit from a declining RCKT stock price.
While it’s difficult to ascertain the intentions of all options market participants, RCKT stock is an example of why investors shouldn’t rush into an idea simply on face-value readings. There could be more going on underneath the surface.
A Worrying Conflict
Even with the massive rise in RCKT stock recently, the Barchart Technical Opinion indicator states that the security is a 16% weak sell. While some longer-term indicators may have shifted positively, the overall consensus is pessimistic.
Curiously, this framework clashes with Wall Street’s view of Rocket. Among 12 experts, RCKT stock is rated a strong buy, breaking down as 11 strong buys and one moderate buy. What’s more, the magnitude of the rating increased mathematically from three months ago due to one strong buy and one moderate buy dropping out of the equation.
Also, the mean price target for RCKT stock stands at $54, implying over 154% upside potential. Even the low-side target comes in at $39, implying 83.7% growth. With so much enthusiasm for Rocket, it’s no wonder that shares blossomed.
Still, with institutional investors seemingly not convinced, I’d be careful. When an opportunity appears too good to be true, it usually is.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
