MDVN - Biotech with Phase III Vol and Skew

Discussion in 'Stocks' started by livevol_ophir, Feb 4, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    This is a bio-tech with news coming very soon. Here is a snippet from Briefing:

    They [Roth Capital] note MDVN is expected to release Phase 3 data for its clinical study of Dimebon (Alzheimer's), likely early in Q2. Although difficult to predict, believe that odds of success of this study are ~65%, they also cite a high short interest (25% of float) making for a potential major squeeze.

    The charts Tab snapshot in the article illustrates the IV30&#8482 (red line) spiking into the phase III results while the underlying is sitting still in anticipation (blue line is HV20&#8482).

    The Skew chart is included in the article - since the news is due out in March (after Feb expo.) you can see the front month vol (red) is substantially below the other months. A snip from the Options Tab is embedded in the chart - you can see Feb vol is 71 vs. Mar vol of 153.

    Finally the Options Tab in the article demonstrates the options markets.

    Anytime bio-techs enter into these high vol events, options prices can get pretty whacky. A few things that caught my eye from the montage:

    (1) The Feb vol is still in the 70's even though the news is due for after Feb expo. The ATM straddle (Feb 35) is still priced: 3.55 x 4.15. In other words, fair value is ~ $4 on a $35 stock, or 11.5% for two weeks.

    (2)The Jun 35 ATM straddle is worth about $25 (ish). A purchase would require the stock to move above $60 or below $10 - now that's some juice. 25/35 = 71% implied stock move by end of June.

    (3) The March ATM straddle is ~$14.50 fair value. A purchase of March and sale of Feb costs ~$10.50. If Feb rolls off as close to worthless (i.e. stock trades $35 at expo) you could own a $10.50 straddle that has fair value of $25 in June with news in March. I'm pretty sure more news is coming after March just looking at these prices. I leave it to the reader for more complete research.

    (4) The March 45 calls have fair value $4.60. The March 25 puts have fair value $2.55. Both are ~10 out of the money.

    (5) The March 65 calls are worth $2 - whoa! Enough said. You could buy 1 March 50 call for ~3.60 and sell 2 Mar 65 calls @ ~2 and receive 0.40. You make money unless the stock goes above 80! That doesn't mean it's a good trade, it means the option markets are pricing that as a legitmate possibility. That's ~1500% annual return for $35 stock going to $80 in a month.

    The general rule for bio-techs is that the wings (OTM options) are too expensive and the guts (ATM options) are too cheap. Having said that, "general" rules might not do you a lot of good if you're short the wings in a stock that moves 200% in one day.

    This is trade analysis, not trade recommendations.

    Details, charts, skews, prices here:
  2. hello how r u? this post is very nice..
  3. jprad


    How is it nice?

    Did you evaluate each of his scenarios in light of how badly MDVN was crushed when their study didn't meet it's endpoints?
  4. Hi,
    it's very great informative stuff shared here useful one for many others who needs this kind of stuff,…
    i appreciate this effort,..
    best regards