MDVN Collapses : Options Action - Trading a Bio-tech

Discussion in 'Trading' started by livevol_ophir, Mar 3, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    Details, trades, prices, skews, charts here:
    http://livevol.blogspot.com/2010/03/mdvn.html

    ** UPDATE
    Read the first MDVN blog on 2-4-2010 here: http://livevol.blogspot.com/2010/02/mdvn.html

    MDVN is trading 12.92 down $27.33 or 67.9%. IV30™ is down 175 points or 68%.

    The news, obviously, wasn't good - the drug candidate for treating Alzheimer's disease proved largely ineffective. The full Reuters Key Development from Livevol Pro is included (in the article).

    Zero Hedge reports ~16,000 Apr 40 calls were purchased yesterday right before the close for $14 - now worth $27. That's $13 x 100 x 16000 = $20.8 million. The Zero Hedge report of above is actually missing info.
    4200 + 5200 + 4200 + 4200 = 17,850 right on market close for $23 million.

    BUT THERE's MORE:
    These were spreads - they also sold calls!
    2535 + 3169 + 2535 + 1500 = 9739 calls for $17,140,640 profit.
    That's over $40 million in profits. The Time & Sales Snap is in the article.

    Let's re-visit some of the observations from the first blog in Feb (2/4):

    -------------------------
    (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.
    -- New Comment: That straddle was a sale; on expo the stock closed 37.62.

    (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.
    -- New Comment: That straddle was also sale; the puts are worth ~$22, the calls are worth ~zero.

    (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.
    -- New Comment: Selling Feb to purchase March would have been an ~ $18 winner (or $1800 for one single straddle).

    (4) See article: http://livevol.blogspot.com/2010/03/mdvn.html

    (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.
    -- New Comment: Another winner - but not as good a trade as the others. If the news was opposite (stock up $27 --> $73) the sale was still good.
    -------------------------

    Clearly buying the March ATM straddle was a winner - and even more so if you could have funded it with what ended up an expensive Feb straddle. Bio-techs are extraordinarily difficult to trade and feel sort like a coin flip really. I get the feeling someone always knows more than I do (i.e. biology, medicine experts).

    The basic rule is buy the ATM straddles in the month of news and sell the wings. Having said that - I wouldn't have wanted to sell the 20 puts @ .20 (or whatever) since the're worth $7 now.

    The Charts Tab is included (in the article). The bottom portion of the chart are the vols: IV30™ (red) vs. HV20™ (blue). The yellow shaded area charts the vol difference.

    Finally the Skew Tab is included (click to enlarge) for both days (2/4) and today.

    Skew Legend:
    Red - Front month
    Yellow - Second month
    Green - Third month
    Blue - Fourth month

    The shapes are fairly similar - what's easily lost are the absolute vol levels. Looks like ~60 point vol drop for the second months.

    This is trade analysis, not a recommendation. Details, trades, prices, skews, charts here:
    http://livevol.blogspot.com/2010/03/mdvn.html
     
  2. livevol_ophir

    livevol_ophir ET Sponsor

    Bloomberg reports ~16,000 Apr 40 calls were purchased yesterday right before the close for $14 - now worth $27. That's $13 x 100 x 16000 = $20.8 million. The Bloomberg report of above is actually missing info.

    4200 + 5200 + 4200 + 4200 = 17,850 right on market close for $23 million. BUT THERE'S MORE:

    These were spreads - they also sold calls!
    2535 + 3169 + 2535 + 1500 = 9739 calls for $17,140,640 profit.