Yesterday Sanofi-Aventis reported a fourth quarter earnings miss and said EPS would be flat to down 5% in 2013. This caused the stock to gap down about 5% and close near that level. The news was followed by unusually high option trading, especially on the put side. The biggest trade of the day was the purchase of 500 June 42 calls for $1.50 with the stock at 44.86. This is a bearish bet that the stock will be below 40.50, 10% lower, at June expiration.

Sanofi has been one of the best performing stocks in the pharma industry, up about 25% over the last 12 months. The reason for Sanofi’s pessimistic outlook is a slew of patent expirations early this year. The most significant is the expiration of their patent for Plaviks, one of the top selling prescription drugs worldwide. Though the near term outlook is nothing to get excited about, Sanofi looks prepared to return to growth in late 2013 and beyond.

The company has been focused on building a pipeline of drugs that focus on emerging markets, vaccines, over the counter treatments, animal health, and generics. Some of their most promising products called biologics, which are proteins like antibodies and insulin, and have lower failure rates than other drugs. Sanofi’s pipeline in general has been receiving above average approval rates, with Lyxumia receiving approval from the European Commission yesterday.

Sanofi’s major patent expirations are now behind them but they do not have many of their new drugs in production yet. This gap, which could last the better part of 2013, could take a toll on the company’s stock price and is the reason this trader was buying puts. However, the overall outlook for Sanofi is positive and any dips could be buying opportunities. For anyone long the stock I like the idea of hedging with a June put like this trader did, and financing the purchase with the sale of a longer dated put sale at a level you are willing to buy the stock. This type of position will protect a stock position from losses if the stock sells of and also lock in a favorable buy price should the stock dip enough.