Heavy, Unusual Put Option Volume Today in Novo Nordisk - Is NVO Overvalued?

A Barchart report today shows unusually heavy volume in out-of-the-money (OTM) put options in Novo Nordisk (NVO), which makes Ozempic and Wegovy (for weight loss and Type 2 diabetes). NVO stock has been moving up, so is it overvalued now?

NVO is at $49.23 in midday trading on July 1, up over 2.6%. In the past 4 weeks, NVO has risen 20% from its low point on June 8 ($41.02).

That could be why there is heavy put option trading today. This can be seen today in a Barchart report: Unusual Stock Options Activity Report.

It shows that an out-of-the-money (OTM) put option strike price has had trading volume over 22 times the prior number of put contracts outstanding.

There have been 10,300 contracts traded at the $47.00 put option strike price, which is 4.5% below today's price, for the contract period expiring July 17. That's a little over two weeks from today.

NVO Put Buyers

So, does this mean investors who believe NVO is overvalued are piling into puts? Will NVO drop in the next two weeks?

The premium for this put option paid by buyers is 63 cents. That means NVO will have to drop to below $46.37 (i.e., $47.00 - $0.63), just for the purchase to have some intrinsic value by July 17.

That implies buyers expect at least a 5.80% drop from today's price.

It's possible this could happen. For example, NVO stock is likely up due to recent news. A new Medicare program allowing some seniors to pay just $50 per month could potentially lead to higher prescription volumes for Ozempic and Wegovy.

However, some detractors believe this may be overhyped. That could be why put buyers are piling into these contracts.

NVO Secured Put Sellers

On the other hand, some investors are happy to short these puts by securing $4,700 per contract with their brokerage firm. After entering a trading order to “Sell to Open” this contract, their account receives $63.00.

That works out to a short-put yield of 1.34% for the next month:

  $63/ $4,700 = 0.0134 = 1.34% 

Moreover, even if NVO falls to $47.00, the investor's net breakeven is just $46.37, 5.8% lower than today's price.

Is that a good entry point into NVO? Let's look at that.

Fair Value for NVO Stock

Analysts now project earnings of $3.30 per share this year, but lower next year at $3.24 EPS. 

Its average 5-year forward price-to-earnings (P/E) multiple has been 28.88x, according to Seeking Alpha, while Morningstar puts it at 12.46x. So, the average of these two is just over 20x (20.67x).

However, its forward P/E is just 15.2x today. 

So, theoretically, NVO could be worth $64.80 (i.e., 20 x $3.24), or +31.6% higher.

So, there is some basis to believe that NVO could be undervalued. However, given that EPS is expected to drop next year, that puts a huge damper on the stock outlook.

Moreover, many analysts have lower price targets (PTs) for NVO stock. For example, Yahoo! Finance shows that the average PT of 14 analysts is $47.35, well below today's price. Similarly, Barchart's mean survey PT is $47.98. 

However, AnaChart has an average PT of $52.29 from 5 analysts, which is over today's price. AnaChart focuses on recent analyst write-ups.

As a result, analysts' surveys are a mixed bag of some analysts thinking NVO is overvalued and some believing it has room to rise.

The Bottom Line

There are good reasons to believe NVO stock could be overextended after its recent rise. Much of the good news is already in NVO stock.

However, short-sellers of these out-of-the-money puts can make a good yield for the next 2 weeks. Moreover, it allows them to have a potentially profitable lower buy-in point.