Wednesday, March 3, 2010

** UPDATE: Medivation (MDVN) Collapses - Insider Trading a Bio-tech


CORRECTION: Zero Hedge published the article using Bloomberg snaps - this was not published by Bloomberg as I originally posted.

Read the first MDVN blog by Clicking Here.

MDVN is trading 12.92 down $27.33 or 67.9%. IV30™ is down 175 points or 68%. The LIVEVOL™ Pro Summary is below.



The news, obviously, wasn't good - the drug candidate for treating Alzheimer's disease proved largely ineffective. The full Reuters Key Development from Livevol Pro is included (click to enlarge).

Zero Hedge reports ~16,000 Apr 40 puts were purchased yesterday right before the close for $14 - now worth $27. That's $13 x 100 x 16000 = $20.8 million. The Zero Hedge report of above was right on (and really fast) but actually is missing info.
4200 + 5200 + 4200 + 4200 = 17,850 right on market close for $23 million.

BUT THERE'S MORE: These were spreads - they also sold calls @ $17.60! While the put purchases are suspicious, the other side of the trade makes the whole spread obvious.

2535 + 3169 + 2535 + 1500 = 9739 calls for $17,140,640 profit.

That's over $40 million in probable insider trading. The Time & Sales Snap is beow (click to enlarge). Note the time - 4pm EST --> i.e. market close.

Let's re-visit some of the observations from the first blog in Feb (2/4):

(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.
-- New Comment: That straddle was a sale; on expo the stock closed 37.62.

(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.
-- New Comment: That straddle was also sale; the puts are worth ~$22, the calls are worth ~zero.

(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.
-- New Comment: Selling Feb to purchase March would have been an ~ $18 winner (or $1800 for one single straddle).

(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.
-- New Comment: Another winner - but not as good a trade as the others. If the news was opposite (stock up $27 --> $73) the sale was still good.


Clearly buying the March ATM straddle was a winner - and even more so if you could have funded it with what ended up an expensive Feb straddle. Bio-techs are extraordinarily difficult to trade and feel sort like a coin flip really. I get the feeling someone always knows more than I do (i.e. biology, medicine experts).

The basic rule is buy the ATM straddles in the month of news and sell the wings. Having said that - I wouldn't have wanted to sell the 20 puts @ .20 (or whatever) since the're worth $7 now.

The Charts Tab is included (click to enlarge). The bottom portion of the chart are the vols: IV30™ (red) vs. HV20™ (blue). The yellow shaded area charts the vol difference.

Finally the Skew Tab is included (click to enlarge) for both days (2/4) and today.

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

The shapes are fairly similar - what's easily lost are the absolute vol levels. Looks like ~60 point vol drop for the second months.

This is trade analysis, not a recommendation.

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