Option Bulls Could Accelerate a GW Pharmaceuticals PLC (GWPH) 'Breakdown'

GW Pharmaceuticals PLC - ADR (NASDAQ:GWPH) attracted attention this morning when the U.S. Drug Enforcement Administration (DEA) said marijuana will remain an illegal Schedule 1 substance due to lingering questions about its medical efficacy. GWPH, which is developing a cannabis-based epilepsy treatment, has previously warned of DEA-related delays for its drug to reach the U.S. market, but today's news was generally considered a positive for scientists and researchers.*

Earlier, the stock was down by as much as 2.4%, but at last check, is off only 0.2% at $86.38. Still, that didn't stop one analyst from suggesting GWPH shares are "on the brink of a technical breakdown," as they approach their supportive $85 level -- since there are few other potential footholds until the round $70 area. That lower level also corresponds with GWPH's lows following its mid-March bull gap.

The aforementioned technical analysis could be exacerbated by high levels of optimism. GWPH's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio is 1.76 -- just 10 percentage points from an annual peak. In other words, traders have bought to open calls over puts at a historically accelerated clip.

Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.85 sits in the call-skewed 1st percentile of its annual range. From a contrarian perspective, an unwinding of this optimism could result in headwinds.

Another potential bad omen is the recent decline we've seen in GWPH short interest. Specifically, short interest fell 18% during the most recent reporting period. However, if the shares breach $85 and start speeding toward $70, a resumption in short selling could catalyze the losses.

Last but not least, five of six analysts rate GW Pharmaceuticals PLC - ADR (NASDAQ:GWPH) a "buy" or better. This leaves the door wide open for a future round of downgrades, which could trigger even more selling activity.

*Editor's note: The original text of this article included an inaccurate report of GWPH's response to the DEA ruling. We regret the error.
 

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