AUXL - June Put Spread Opportunity

Discussion in 'Options' started by livevol_ophir, Jun 8, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AUXL is trading $25.68, down 7.9% with IV30&#8482 up 5.0%.

    <img src="">

    The company has traded over 4,100 options in the first hour on total daily average option volume of just 744. All of the action is in the front month. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) helps to illustrate the trades:

    1) Jun 25/30 put spread purchase for $3.30 ($0.60/$3.92).
    2) Jun 30 call, I believe are purchases though they are trading on the bid, 1000x.

    The Jun 30 puts have long OI (I think), so this is adding to the interest. Jun 25 puts are mostly opening (compare trade volume to OI). I believe the Jun 30 calls are closing (i.e. purchases against short interest, but I am not sure).

    The put spread is an interesting trade, so let's look at some details.

    1) Max gain is $5.00 - $3.30 = $1.70
    2) Max loss is $3.30 (price paid).
    3) Payoff ratio is 1.7/3.3 ~ 1/2
    4) At the time of this post, with the stock at $25.68, parity is $4.32. In other words, if the stock closes here on expo, this trade wins $4.32 - $3.30 = $1.32 or 40% in less than two weeks.

    Some news came out on a drug, the tick chart (below) is included. I'm no expert on this company, but I don't think it's a huge leap here to say that it wasn't good news. The top is stock price, the bottom is July vol.

    <img src="">

    Let's look at the Charts Tab (6 months) before the Skew (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    We can see the stock dipping recently and then the relatively larger decline today on the news. I like that this spread is a winner to parity right now, the stock is dipping and the news looks like it could hold the stock down for a week or so (which is all this trade cares about). Obviously the trade off is that the payoff is 1:2.

    Note that one of AUXL's partners just authorized a stock re-purchase program (I dunno if that matters, but I figured I'd share it).

    Finally, the Skew Tab snap (<a href="">in the article</a>) illustrates the vols bot/sold relative to everything else.

    June (red) is elevated relative to the other months and the downside looks normal(ish). The back months are bit parabolic rather than "smirkish," but that can happen with small pharma. The upside in June looks crazy bid, but it's just a random nickel bid in the 35 calls (32.5 are no bid).

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
  2. Is there any way to derive/estimate the probability of the maximum loss or gain on that debit spread? :confused:
  3. livevol_ophir

    livevol_ophir ET Sponsor

    sure, in the short term most people use a log normal distribution for the stock (or normal for the returns (log)). Given the implied vol you have your "sigma." If you assume zero drift, then your mean is the current price.

    You need P(stock price >= 30).