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AcelRx Pharmaceuticals (ACRX) Upgraded to Buy: Here’s Why

AcelRx Pharmaceuticals (ACRX) Upgraded to Buy: Here’s Why

AcelRx Pharmaceuticals (ACRX) could be a solid choice for investors given its recent upgrade to a Zacks Rank #2 (Buy). This upgrade is essentially a reflection of an upward trend in earnings estimates — one of the most powerful forces impacting stock prices.

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The Zacks rating relies solely on a company’s changing earnings picture. It tracks EPS estimates for the current and following years from the sell-side analysts covering the stock through a consensus measure — the Zacks Consensus Estimate.

The power of a changing earnings picture in determining near-term stock price movements makes the Zacks rating system highly useful for individual investors, since it can be difficult to make decisions based on rating upgrades by Wall Street analysts. These are mostly driven by subjective factors that are hard to see and measure in real time.

Therefore, the Zacks rating upgrade for AcelRx Pharmaceuticals basically reflects positivity about its earnings outlook that could translate into buying pressure and an increase in its stock price.

Most Powerful Force Impacting Stock Prices

The change in a company’s future earnings potential, as reflected in earnings estimate revisions, has proven to be strongly correlated with the near-term price movement of its stock. That’s partly because of the influence of institutional investors that use earnings and earnings estimates for calculating the fair value of a company’s shares. An increase or decrease in earnings estimates in their valuation models simply results in higher or lower fair value for a stock, and institutional investors typically buy or sell it. Their bulk investment action then leads to price movement for the stock.

For AcelRx Pharmaceuticals, rising earnings estimates and the consequent rating upgrade fundamentally mean an improvement in the company’s underlying business. And investors’ appreciation of this improving business trend should push the stock higher.

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Is the Options Market Predicting a Spike in AcelRx (ACRX) Stock?

Is the Options Market Predicting a Spike in AcelRx (ACRX) Stock?

Investors in AcelRx Pharmaceuticals, Inc. ACRX need to pay close attention to the stock based on moves in the options market lately. That is because the Nov 20, 2020 $2.50 Call 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 AcelRx shares, but what is the fundamental picture for the company? Currently, AcelRx is a Zacks Rank #3 (Hold) in the Medical – drugs industry that ranks in Bottom 24% of our Zacks Industry Rank. Over the last 60 days, one analyst has increased the earnings estimates for the current quarter, while none have revised their estimates downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from a loss of 11 cents per share to a loss of 7 cents in that period.

Given the way analysts feel about AcelRx right now, this huge implied volatility could mean there’s a trade developing. Often times, 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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