Friday, July 16, 2010

Vivus (VVUS) - Bio-tech Gone Wrong; A Look Back at Option Market's Accuracy

VVUS is trading $5.06, down 58.3% with front month vol down several hundred points. The LIVEVOL™ Pro Summary is below.

This is an update to the blog Vivis (VVUS) - Biotech's Gigantic Vol Yields Arbs on the Table Right Now

The news from AP:
Shares of Vivus Inc. plunged more than 50 percent in premarket trading Friday after a Food and Drug Administration panel recommended against approving the company's potential weight loss drug Qnexa, citing safety concerns.

The panel of experts voted 10-6 against the drug, citing potential risks from long-term use. The FDA normally follows the recommendation of its experts, though it is not required.

Shares of Vivus fell $6.42, or 53 percent, to $5.69 in premarket trading. The stock closed at $12.11 on Thursday.

The blow comes as competitors in the weight loss drug market gear up for their own FDA panel meetings this year. Wall Street has been following the development of Arena Pharmaceuticals Inc.'sLorcaserin and Orexigen Therapeutics Inc.'s Contrave to determine which will be the strongest potential competitor.

Basically, a bio-tech gone bad. First, let's look at the Options tab snap from today (on top), and then from the original post on Monday (below it). Click either image to enlarge.

Note that the July 11 straddle (ATM) on Monday had fair value of $6.20. Today that straddle is all parity in the puts so it's worth about $6. Hold that thought, now let's look to the Chart.

The Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can the implosion in stock price and IV30™. In this case, even though the stock went down, the vol went down too because the news is out. If someone ever says vol always goes up when stocks go down, you have a counter point; bio-techs on FDA news (there are others; like lawsuits).

We knew that vol was going to get crushed with an extremely high probability. The problem was, no one knew (ok someone knew) if the stock would move more or less to the implied vol. When we look at the straddle values for what were the ATM we see that in fact, the options markets reflected a pretty good guess of fair value.

Finally, the Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can see the Sep skew bends up; even the Sep 12 calls are nickel bid. This reflects greater upside risk than downside risk out to Sep. Of course, a move to $12 means $7 up from here. And I'm pretty sure VVUS will not go down $7 from $5.06... Ok, I'm really sure.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. I wonder if there were a high probability strategy on Monday that would be a winner under any vote of the panel? Apparently selling at the money straddle was not.

  2. If you were able to get the arb off in the first post, that was a very high probability of success. The only possible problem was a halt past expo. Other than that, I think there were other good cheap bets, the skew was not settled - that's why the arb existed.

  3. arb is good of course. But those who can execute it in real world have many other interesting opportunities as well. What cheap bets you think were good for at home trader?

  4. I liked anything that sold the wings while covering with the meat. Sort of, skew hunting...

  5. sorry, can you give an example? I don't quite understand the terminology :)

  6. If bearish:
    Buy 11 puts
    Sell 8 and 9 puts
    Buy 7 puts

    At fair value that was $155 Max Gain to $45 Max Loss.

    If bullish:
    Buy July 11 calls
    Sell July 13 calls
    Sell July 14 calls
    Buy July 15 calls

    Stuff like that...

  7. Thanks!

    Do you prefer to sell strangles over straddles or it's just for particular example?

  8. It's specific to each situation; I guess I prefer to sell straddles overall.

  9. A reverse butterfly if you will?

  10. I love doing normal butterflies; sell the meat buy the wings; but not in bio techs.

  11. Do you usually leg into butterflies to create the ideal spread?

  12. I try not to leg; if the trade is there then do it; otherwise, I pass.

  13. Is there an ideal environment that you look for butterflies? After earnings for example?

  14. I guess my answer to that is the same for all trades. Whenever I think the payout ratio is greater than the odds to win. Before earnings or big announcements sometims offer the best ratios and a lucky guess may payout 20:1 where teh odds are better than 1:20, for example.