Thursday, February 4, 2010

Medivation (MDVN) - Phase III Trial Vol and Skew

MDVN is trading 35.74. The LIVEVOL™ Pro Summary is below.

The business and financial summaries are below (coming very soon to Livevol Pro) - click the image to enlarge it.

This is a bio-tech with news coming very soon. Here is a snippet from Briefing and
They [Roth Capital] note MDVN is expected to release Phase 3 data for its clinical study of Dimebon (Alzheimer's), likely early in Q2. Although difficult to predict, believe that odds of success of this study are ~65%, they also cite a high short interest (25% of float) making for a potential major squeeze.
SAN FRANCISCO (TheStreet) -- Medivation(MDVN) and Pfizer(PFE) could release top-line results from a phase III study of their Alzheimer's disease drug Dimebon in early March, according to a story published Tuesday by Bloomberg.

The charts Tab snapshot below (click to enlarge) illustrates the IV30™ (red line) spiking into the phase III results while the underlying is sitting still in anticipation (blue line is HV20™).

The Skew chart is included below as well - since the news is due out in March (after Feb expo.) you can see the front month vol (red) is substantially below the other months. A snip from the Options Tab is embedded in the chart - you can see Feb vol is 71 vs. Mar vol of 153.

Finally the Options Tab below (click to enlarge) demonstrates the options markets for the first 3 months (full montage available in the app).

Anytime bio-techs enter into these high vol events, options prices can get pretty whacky. A few things that caught my eye from the montage:

(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.

(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.

(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.

(4) The March 45 calls have fair value $4.60. The March 25 puts have fair value $2.55. Both are ~10 out of the money.

(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.

The general rule for bio-techs is that the wings (OTM options) are too expensive and the guts (ATM options) are too cheap. Having said that, "general" rules might not do you a lot of good if you're short the wings in a stock that moves 200% in one day.

This is trade analysis, not trade recommendations.

Legal Stuff:

No comments:

Post a Comment