VVUS - Biotech's Gigantic Vol Yields Arbs on the Table Right Now

Discussion in 'Options' started by livevol_ophir, Jul 12, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    VVUS is trading $10.46, with IV30&#8482 up 16.22 points or 7.5% to 245.05.

    <img src=http://4.bp.blogspot.com/_hMry1m7UF10/TDtXBRKNNKI/AAAAAAAADd4/W3F-iGh5aDo/s1600/vvus_summary.gif">

    News Below:
    The FDA is expected to post its review of Vivus Inc.'s pill Qnexa on Monday and will hold a public meeting Thursday to review the data. Arena Pharmaceuticals Inc.'s lorcaserin is set for an FDA panel review in September, while Orexigen Therapeutics Inc.'s Contrave will be the subject of a December panel.

    To be considered effective, obesity drugs should reduce total body weight by at least 5 percent after one year, according to FDA guidance to companies.

    Qnexa showed the best weight loss results in clinical trials, with patients losing between 13 percent and 15 percent of their body weight. But the drug also had the highest rate of patient dropouts due to side effects, which include memory and concentration problems.

    Qnexa is a combination of two older drugs: the amphetamine phentermine and topiramate, an anticonvulsant drug sold by Johnson & Johnson as Topamax. According to the company, phentermine helps suppress appetite, while topiramate makes patients feel more satiated.

    The company has traded over 54,000 options on total daily average option volume of just 13,437. The largest trades are Jul 17.5 calls (yes 75% out of the money expiring in four days) and the July 7 puts (purchases which require 45% downside move in four days to win). The Stats Tab and Day's biggest trades snapshots are included (<a href="http://livevol.blogspot.com/2010/07/vvus.html">in the article</a>).

    The Options Tab (<a href="http://livevol.blogspot.com/2010/07/vvus.html">in the article</a>) illustrates the enormous vol in the front month; over 750 in the ATM straddle. Yeah, 750...

    Let's take a look at a couple of trades which help illuminate the "expected" move on the FDA decision.

    Trade 1:
    Sell July 10 straddle @ $6.40
    Buy July 13 calls for $1.80
    Buy July 7 pus for $1.50
    Net Credit = $3.10

    Yse, that's right, an arbitrage. A no lose strategy.
    Max Loss = +$10
    Max Gain = $3.10

    Of course, this is using "mid market." If we use the bid (to ell) and the offer (to purchase) we get:

    Trade 2:
    Sell July 10 straddle @ $6.25
    Buy July 13 calls for $1.90
    Buy July 7 pus for $1.50
    Net Credit = $2.85

    Max Gain: $285
    Max Loss: $15
    For a 19:1 ratio. That implies there is ~5% chance the stock moves less than 30% in the next four days. Hi, how are you, my name is crazy vol.

    The articles describe very nicely how eager the US public is for a winning diet drug given that 35% of US adults are obese. The news, good or bad, is expected to have a huge impact on the stock. Note that the July 25 calls are bid. That's 150% in four days, or 9,375% annualized.

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

    We can see how elevated the volis in the front month; but it still maintains a fairly normal looking skew all things considered. A nice thing about a $10.50 stock is that it can only go down $10.50; that, in and of itself, is downside protection.

    This is trade analysis, not a recommendation.
  2. could the patients simply forget to eat while on the drug?

    SHORT the stock!

    Shortie Kevorkian Out :cool:
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Looks like the news is out on Thursday; if it's out AMC, then the options are 100% vol. Would be nasty if they halted trading through expo (options halt automatically then too). Wake up Monday morning with a position... yikes.