VVUS - Bio-tech Gone Wrong; A Look Back at Option Market's Accuracy

Discussion in 'Options' started by livevol_ophir, Jul 16, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    VVUS is trading $5.06, down 58.3% with front month vol down several hundred points.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TEBzvlgRR7I/AAAAAAAADk4/sWwpufXYvhA/s1600/vvus_summary_update.gif">

    This is an update to the blog <b><a href="http://livevol.blogspot.com/2010/07/vvus.html">Vivis (VVUS) - Biotech's Gigantic Vol Yields Arbs on the Table Right Now</a></b>

    The news from AP:
    Shares of Vivus Inc. plunged more than 50 percent in premarket trading Friday after a Food and Drug Administration panel recommended against approving the company's potential weight loss drug Qnexa, citing safety concerns.

    The panel of experts voted 10-6 against the drug, citing potential risks from long-term use. The FDA normally follows the recommendation of its experts, though it is not required.

    Shares of Vivus fell $6.42, or 53 percent, to $5.69 in premarket trading. The stock closed at $12.11 on Thursday.

    The blow comes as competitors in the weight loss drug market gear up for their own FDA panel meetings this year. Wall Street has been following the development of Arena Pharmaceuticals Inc.'sLorcaserin and Orexigen Therapeutics Inc.'s Contrave to determine which will be the strongest potential competitor.

    Basically, a bio-tech gone bad. First, let's look at the Options tab snap from today (on top), and then from the original post on Monday (below it). <a href="http://livevol.blogspot.com/2010/07/vvus_16.html">In the article</a>.

    Note that the July 11 straddle (ATM) on Monday had fair value of $6.20. Today that straddle is all parity in the puts so it's worth about $6. Hold that thought, now let's look to the Chart.

    The Charts Tab (6 months) is below (<a href="http://livevol.blogspot.com/2010/07/vvus_16.html">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 the implosion in stock price and IV30&#8482. In this case, even though the stock went down, the vol went down too because the news is out. If someone ever says vol always goes up when stocks go down, you have a counter point; bio-techs on FDA news (there are others; like lawsuits).

    We knew that vol was going to get crushed with an extremely high probability. The problem was, no one knew (ok <i>someone</i> knew) if the stock would move more or less to the implied vol. When we look at the straddle values for what were the ATM we see that in fact, the options markets reflected a pretty good guess of fair value.

    Finally, the Skew Tab snap (<a href="http://livevol.blogspot.com/2010/07/vvus_16.html">In the article</a>) illustrates the vols by strike by month.

    We can see the Sep skew bends up; even the Sep 12 calls are nickel bid. This reflects greater upside risk than downside risk out to Sep. Of course, a move to $12 means $7 up from here. And I'm pretty sure VVUS will not go down $7 from $5.06... Ok, I'm really sure.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, charts, skews here:
  2. spindr0


    My 2 cts is with these FDA denials that drive the stock well below $10, a more reliable trade is looking for the dead cat bounce after the collapse. Trade the stock... it's now an equivalent to an expensive option :)
  3. livevol_ophir

    livevol_ophir ET Sponsor

    well said. The skew actually agrees with you; upside move more likely than downside no that it has collapsed.
  4. xyannix


    I wrote an article on July 1st about this stock on www.optionsweekly.com

    It was amazing all the Seeking Alpha comments I got from people saying that the straddle doesn't tell you where the stock can move.

    Basically, I said the stock will go to $5 or $15 and did a nice deep in the movey covered call and didnt lose a dime!

    Read the full article here http://bit.ly/ciBBSm
  5. livevol_ophir

    livevol_ophir ET Sponsor

    I liked your article; well done.