Most stocks have an options skew such that the lower strikes trade at higher IV's, and the higher strikes trade at progressively lower IV's. A remarkable exception at the moment is MYGN. In every month, the higher the strike, the higher the IV. I know that they're expecting a big announcement on their Alzheimer's drug Flurizan, and so people are excited about possible upside. But the same is true of WYE and ELN - and those stocks have a skew like any other. So why is MYGN so different? I suppose one possibility is insider trading. I come from the futures world where that isn't much of a factor, so I don't know how much that can influence the skew so far in advance (the MYGN skew has been like this for some time). Any thoughts?
I traded option on both MYGN and ELN the past month. ELN news is already out. MYGN news is going to be out anytime now and if its good this is a blockbuster drug if approved we are talking about billions. The upside is huge, even if the data is inconclusive the stock won't move down much because they already have a diagnostic business that's making money. This is just a short summary. Do the research if you want to play them.
Dmo , this is typical for FDA events ( without firm date) . Its all based on expected binary outcome. There is practically no theta or time decay. IV calculations derive from firm/unchanged ATM premium. The higher the price of the stock the higher the ATM straddle
Thanks. Off the top of your head, can you think of any other similar FDA events within the last few years? I'd like to go back and see how they played out. If you can think of the name of a company and the year and approximate month - or the name of the drug - I could look it up. Do you know any sites that specialize in talking about such events? Thx.
The back testing is practically impossible here, imo (mainly due to uncertainly in event month). Look into two strategies for FDA play : 1.RC if event is in front month , like in case of MYGN ( but itâs a disaster if its postponed) 2.Time fly if event is NOT in the front month
If this was futures, then it would surely collapse no matter what the news. That's what always happens when a skew reverses its normal pattern - you can fade it with confidence. In other words, the otm calls becoming so incredibly expensive is a reliable indicator of excessive bullishness. It's got nowhere to go but down. Maybe it's different in biotech. This is my first "FDA event," so it'll be interesting to see. But I wouldn't be surprised to see this thing tank on the announcement, unless the results are absolutely stellar. And maybe even then.
as an experienced Biotech sector trader, I don't recommend you play with "FDA event" if you are risk adverse or your account is small. Also MYGN is not having a "FDA event", they are just going to announce their topline result for phase III. goodluck
Magicz - do you know of any site that has a calendar of past (and/or future) such phase III announcements? I would love to go back and see how premium behaved before and after other such events. Any other sources of info you can recommend about this sector would be much appreciated. Thx.
here is one I use once in awhile. go to the forum. http://www.biotechwatch.com/ but if you really want to research back on any particular company just go to their SEC filing or conference call transcript to find out exactly when they announce data, timeline to FDA submit and approval. There isn't really a quick and dirty way.