2 Biotechs Mobbed By Short Sellers

Short interest among S&P 500 Index (SPX) components has been on the rise in 2016, even as stocks have staged the biggest quarterly comeback since the Great Depression. Short interest is at its highest level since September 2008, according Fundstrat Global Advisors, accounting for 4.3% of all available float. As contrarians, however, we know that elevated levels of short interest can signal sideline cash, should a stock rally in spite of the bears. Among equities that are higher year-to-date but sport record-high short interest are biotech firms AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) and Opko Health Inc. (NYSE:OPK).

AMAG fell nearly 74% from its July 2015 record high of $77.73 to its March 17 annual low of $20.21. However, the stock has been on the mend in April, thanks to a big-time week for biotechs. What's more, AMAG is set to end atop its 20-week moving average for the first time since late August, up 3.3% at $25.97 today.

In the option pits, volume on AMAG typically runs light, on an absolute basis. Even so, long calls have clearly been the options of choice among recent speculators, outpacing long puts more than 100-to-1 in the past two weeks. The resulting 10-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) of 103.82 sits just 1 percentage point from an annual high.

But as alluded to earlier, short sellers have been upping the ante in recent weeks. These bearish positions have risen by about 18% over the past month, and now represent almost one-third of AMAG's total float. This could explain the recent options action, too -- the flood of call buyers may in fact be short sellers looking to hedge their pessimistic positions. But if AMAG continues its rebound -- or if AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) shines at next week's Needham Healthcare Conference -- the shorts could be feeling the heat.

Meanwhile, after a recent decision from the Food and Drug Administration (FDA) failed to come out in OPK's favor, the stock dropped back to support at its 30-day moving average. But the shares added 3.3% in April, and maintain a 6.6% year-to-date lead. Today, OPK is up 0.3% at $10.71.

Option traders have been less hopeful than usual, however. While long calls on OPK have outnumbered puts nearly 3-to-1 over the last two weeks, the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 0.37 is higher than 85% of all readings in the past year. In other words, option buyers have picked up OPK puts over calls at a faster-than-usual pace.

And outside the option pits, pessimism has been slowly building. Short interest on OPK now represents nearly one-fifth of its available float. At the stock's typical pace of trading, it would take almost 19 days to cover all of these positions. Should Opko Health Inc. (NYSE:OPK) resume its 2016 rally, a short squeeze could add fuel to the fire.