Thursday, March 11, 2010

Alkermes (ALKS) - Order Flow Pre FDA Decision

ALKS closed at 12.64 yesterday. The LIVEVOL™ Pro Summary is below.

The company is in a three way partnership with AMLN and LLY for a drug and possible new applications for it. The FDA PDUFA meeting is scheduled for 3-12-2010 (today).

ALKS traded 25,000+ options yesterday on total daily average volume of 2,306. The largest trades were the sale of the Apr 10 puts, purchases of Apr 12.5 calls and sale of the Apr 15 calls in a three way spread paying net $0.40. The Stats Tab and Day's biggest trades snap are included (click to enlarge).

The Options Tab snap illustrates the trades - the sizes on all three lines are greater than the OI - this is an opening position. Note also the front month vol nearly 70 points above Apr and 90 points above May.

A multi-leg strategy is often times easier to understand by breaking the trade down:
Sell Apr 10 puts @ $0.45
Buy Apr 12.5/15 call spread for $0.85 ($1.30 and $0.45)

So this is the purchases of a call spread (bullish) funded by the sale of puts (bullish) ~3,500x. Max gain is ($2.5 - $0.40)x 3500 x 100 = $735,000 on an outlay of 3500 x 100 x $0.40 = $140,000 or approximately a 5:1 max payout. Max gain is achieved at $15 (or above). Max loss is at stock going to $0 (i.e. short puts).

The Skew Tab snapshot is included (click to enlarge). Notice the extreme vol in the front month (red) relative to the other months (and specifically the second month - yellow). This is expected as the vol event is - right now. Note also the shape of the front month - it's more parabolic than a smirk - the options are essentially indicating no directional bias if not slightly upward.

Skew Legend:
Red - Front month
Yellow - Second month
Green - Third month
Blue - Fourth month

Finally, the Charts Tab (1 year) is below (click to enlarge). The stock price is the top portion, the vol chart is the bottom. The red line in the vol section (IV30™) is well above the blue line (HV20™) but this expected with an FDA decision due.

Ultimately there was bullish sentiment for the decision due today. This is trade analysis, not a recommendation.

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