Wednesday, April 7, 2010

King Pharma (KG) - Option Bets Outside of Known News

KG is trading 12.00 with IV30™ up 16.1%. The LIVEVOL™ Pro Summary is below.

The company has traded over 6 times total daily average option volume in the first two hours of trading. Zero puts have traded - all 8,700 contracts are calls. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge). Apr 12.5 call purchases are the action.

The news (click to enlarge) that I found discusses a trial for an application of a drug - but the trial is 12 weeks. Snippet:
"This Phase IIb trial is a 12-week, randomized, double-blind..."

I bring up the 12 week time horizon with an eye at the order flow and the Options Tab (click to enlarge). Note that the Apr 12.5 calls are trading size, on size OI. Of course, April options expire in just 10 days. Also note the huge vol jump in April - 19 points or 38% in one day.

This lead me to believe the purchases today were simply closing short positions from before - i.e. I figured the 18,000 OI was short. The Level 2 pop-out for this strike is below.

You can see a massive jump in OI (10,000+) on 4-5-2010 indicating large trades on 4-1-2010 (the trading day before). An investigation into the OI reveals that it is in fact long, not short. In other words, the purchases today are in addition to the already long 18,000. So the OI is going to be above 20,000 tomorrow - when the largest OI outside of that on any other line is just 4,079 in the May 12.5 calls - which by the way is also long and also opened mostly on... 4-1-2010...

The Skew Tab (click to enlarge) illustrates the now upward bend in the skew and in particular the divergence between the front month (red) and the back months.

The order flow is one sided, it's a bio-tech, the news is relevant only outside April (actually outside May as well) but the bets keep pouring in the same side more than 5x any other line...

This is trade analysis, not a recommendation.

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