Friday, October 29, 2010

Avanir Pharma (AVNR) - Analyzing a PDUFA Date & Trades

AVNR closed at $2.81, up small with IV30™ now nearly 400% coming into the PDUFA date. The LIVEVOL™ Pro Summary is below.



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Jeff Kearns and Rob Waters at Bloomberg authored a nice article on this bio-tech a couple of days ago. You can read that post here:
Avanir Short-Sale Bets Rise to Record Before Oct. 30 FDA Ruling on Drug

Yesterday the company traded over 41,000 options on total daily average option volume of just 5,572. The net premium is quite large, indicating that people are buying options even with vol at this level. Note that calls traded 3:1 to puts. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates the action in Nov. The Nov 1 puts traded 3,000+ times, and this morning OI is nearly 8,000 so they were opening. The Nov 3 calls traded 10,000+ x. The OI this morning is nearly 20,000, so those two were opening.



The Skew Tab snap (below) illustrates the vols by strike by month.



Other than the very high vols, the shape is pretty normal. Note that the front month (red) is much higher than the back, indicating that the options market believes that it's a virtual certainty that the "news" will be out this cycle.

What Does the Option Market Imply
The Nov 1 puts closed $0.15 x $0.20, so give it a fair value of $0.175. On the floor we call these the "bankruptcy puts." In other words, if those go in the money, the company is virtually (or literally) done. Very rough back of the envelope trader speak says that we see a ~20% chance this thing goes belly up on the news.

We can also see that the Nov 6 calls have the same market $0.15 x $0.20. Again, roughly speaking, that means the options market indicates an equal likely hood of bankruptcy as the stock moving up ~115% (or more). Jeff's article does a great job of summarizing how the experts feel. I believe it reads that they are ~75% sure this thing gets approved.

If that's the case, then an extremely rough "guess" of where the stock could go on approval would be $6/0.75 = $8... Whoa... $8....

Generally in bio-techs one rule of thumb is that the meat (ATM) is too cheap and the wings are too expensive. Conveniently there are Nov 0.5 puts to use.

If you want to gamble (and that's what this is, a gamble), you can find some premium to play with by selling the Nov 0.5/1 put spread @ $0.10 (or better b/c there is liquidity in the 1 line). That max loss is just $0.40 and hypothetically there is ~ 20% chance that gets realized. Selling the spread @ $0.15 yields a max loss of just $0.35.

You can use that $0.15 of premium, sell some OTM call, and then use that to buy an option. Of course, this assumes you want to gamble on good news. A gamble on "not-good news" is pretty easy. You could just pay $0.05 in the Nov 0.5 puts, or go ahead and do the Nov 1 puts.

Another few things to look at. If you also want to bet that the news is surely in Nov, you could look to sell the 1 puts in Dec. Maybe those get done @ 0.25?...

Anyway, if you play this please be careful if you're naked short or long options. Make sure you apply some sort of probability analysis (even if it's your own) and then make sure your payout looks BETTER than the odds you have conceived.

Ultimately, when the market and vol get wild in a bio-tech, you can find trading gems, like butterflies for even... Hmm... Where would that be?

This is trade analysis, not a recommendation.

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2 comments:

  1. What butterfly would you bet on?

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  2. I would just look for cheap bets (or even arbs) without restricting it to a specfic strike range. I have no idea what's going to happen, but I know that a butterfly within the "reasonable" range for even is a good bet. Selling the downside (since stock can only go to zero) may be a risk worth taking as well especially since it can be covered for $0.05 for the $0.50 strike... But it certainly can be a loser. Just a coin flip, the question is, how is the coin shaved?

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