AMAG - A Spec Bet on Pharma Earnings

Discussion in 'Options' started by livevol_ophir, Oct 28, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AMAG is trading $19.74, down 0.8% and earnings due out today after the close. The <a href="">LIVEVOL™ Pro Summary</a> is <a href="">in the article</a>.

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    I found this one searching through the Calendar Tab looking for a pharma/bio-tech with earnings approaching. Why would I do such a thing?... I like the small bet, big reward you can sometimes find in the high vol bio-techs on earnings. Trades which have a high probability of losing, but ones where the payout may in fact be greater than the bad odds.

    First, let's look to the Charts Tab (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

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    As expected, we can see elevated IV30™ coming into earnings. The ATM straddle in Nov is actually priced at 100 vol (10 points higher than the IV30™). I have also highlighted the last earnings cycle for AMAG where it moved huge in the two days following earnings (about $7 down).

    For completeness, let's look to the Skew Tab (<a href="">in the article</a>).

    Again, as expected, we can see a massive divergence between the Nov and Dec. Nothing necessarily "unusual" here.

    Ok, now to the Options Tab (<a href="">in the article</a>). You'll note that there isn't a lot of trading in there right now, which isn't good in terms of liquidity, but what the hell, let's investigate a little gamble here.

    <b>Possible Trades to Analyze</b>
    Ok, here's the long shot, both in terms of getting an execution and then in terms of actually winning to it.

    1. Do the Nov 19/20/21 call butterfly paying $0.10. This yields a max loss of the debit or $0.10 (excluding commissions and pin risk) and a max gain of $0.90. 9:1, decent. How about this....

    2. Ok, Sell the Nov 20 straddle @ $3.90 ($1.85 in calls, $2.05 in puts). Buy the Nov 19/21 strangle for $2.95 ($1.40 in calls, $1.55 in puts). That leaves a net debit (and max loss) of $0.05, with max gain $0.95. Oooo, 19:1, that's nice.

    With both these trades there is execution risk, and both are most likely losers. But... the butterfly (or condor) for 19:1 payout, feels like a small little bit that may be worth throwing the dice on... small...

    Just to be clear, these trades for $0.15 or even $0.10 have a vastly different MaxGain:MaxLoss ratio, so a nickel difference is huge here. I intended this more as an example of what to look for in bio-techs on earnings. You'd be surprised at the prices you can get.

    This is trade analysis, not a recommendation.

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  2. livevol_ophir

    livevol_ophir ET Sponsor

    Slight correction; trade #2 should read as a credit:

    2. Ok, Sell the Nov 20 straddle @ $3.90 ($1.85 in calls, $2.05 in puts). Buy the Nov 19/21 strangle for $2.95 ($1.40 in calls, $1.55 in puts). That leaves a net credit of $0.95 and max loss of $0.05, with max gain $0.95. Oooo, 19:1, that's nice.