Monday, July 12, 2010

Vivus (VVUS) - Biotech's Gigantic Vol Yields Arbs on the Table Right Now

VVUS is trading $10.46, with IV30™ up 16.22 points or 7.5% to 245.05. The LIVEVOL™ Pro Summary is below.

News Below:
The FDA is expected to post its review of Vivus Inc.'s pill Qnexa on Monday and will hold a public meeting Thursday to review the data. Arena Pharmaceuticals Inc.'s lorcaserin is set for an FDA panel review in September, while Orexigen Therapeutics Inc.'s Contrave will be the subject of a December panel.

To be considered effective, obesity drugs should reduce total body weight by at least 5 percent after one year, according to FDA guidance to companies.

Qnexa showed the best weight loss results in clinical trials, with patients losing between 13 percent and 15 percent of their body weight. But the drug also had the highest rate of patient dropouts due to side effects, which include memory and concentration problems.

Qnexa is a combination of two older drugs: the amphetamine phentermine and topiramate, an anticonvulsant drug sold by Johnson & Johnson as Topamax. According to the company, phentermine helps suppress appetite, while topiramate makes patients feel more satiated.

The company has traded over 54,000 options on total daily average option volume of just 13,437. The largest trades are Jul 17.5 calls (yes 75% out of the money expiring in four days) and the July 7 puts (purchases which require 45% downside move in four days to win). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the enormous vol in the front month; over 750 in the ATM straddle. Yeah, 750...

Let's take a look at a couple of trades which help illuminate the "expected" move on the FDA decision.

Trade 1:
Sell July 10 straddle @ $6.40
Buy July 13 calls for $1.80
Buy July 7 pus for $1.50
Net Credit = $3.10

Yse, that's right, an arbitrage. A no lose strategy.
Max Loss = +$10
Max Gain = $3.10

Of course, this is using "mid market." If we use the bid (to ell) and the offer (to purchase) we get:

Trade 2:
Sell July 10 straddle @ $6.25
Buy July 13 calls for $1.90
Buy July 7 pus for $1.50
Net Credit = $2.85

Max Gain: $285
Max Loss: $15
For a 19:1 ratio. That implies there is ~5% chance the stock moves less than 30% in the next four days. Hi, how are you, my name is crazy vol.

The articles describe very nicely how eager the US public is for a winning diet drug given that 35% of US adults are obese. The news, good or bad, is expected to have a huge impact on the stock. Note that the July 25 calls are bid. That's 150% in four days, or 9,375% annualized.

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

We can see how elevated the volis in the front month; but it still maintains a fairly normal looking skew all things considered. A nice thing about a $10.50 stock is that it can only go down $10.50; that, in and of itself, is downside protection.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. The vol crush is going to be epic!

  2. what happened if stock is halted?
    and in what circumstances it can be halted anyway?

  3. The stock will almost certainly be halted on Thursday if the FDA is discussing the outcome with the market open. What's even scarier is if the halt goes through Friday's close and then Monday rolls around with all the option exercise decisions made on an unknown outcome. Yikes!

  4. so if stock is halted from Thursday morning till Friday close, what are CBOE regulations for settle the option exercising?
    More generally - is it possible to face more then maximum loss ($15) in this iron condor?

  5. I don't think that will happen. Hypothetically, I guess the auto exercises will be based on the halted price.

  6. Remember that as the owner of an option, you may decide to exercise it or to not exercise and let it lapse no matter where the stock price is. The exchanges offer auto exercise as a convenience because they expect you to act rationally, but you may order them to exercise any option you own with contrary exercise instructions.

    I saw a similar thing with Chiron in the early nineties- halted an hour before the close on expiration Friday with a drug decision pending. Stock last traded 48 but lots of 50 and some 55 calls were exercised.

  7. Absolutely true; but still a very hard decision.

  8. will VVUS definitely be halted pre-open tomorrow, or only around the time of the vote?

  9. I can't say anythng is definite. Usually, when a big meeting is happening and a decision is pending, these "FDA" stocks halt until the decision is out. But I am NOT sure it wil happen this time.

  10. It seems to me that some very inexpensive calenders would have tremendous risk/reward. They can be bought for the downside and upside.
    5's and 15's for example. With opex friday and very high vols in the front month, this seems like a super way to go. What do you think?

  11. The risk there is that the news is definitive and the stock moves hard so all the vol goes out. Buying the back gets you long vega which will hurt the most with a vol crush if those options essentially just turn into parity. Having said that, the stock will "exist" after this decision, so options on it should be worth something; just try to find the ones that will be the ATM rather than $10 in/out the money.

  12. I see what you're saying. I was thinking that if it's a positive announcement, we may get a 25-30% bump -- because the final decision isn't until Oct. It's at around 12 now, so I am targeting around 15 for the upside. If the announcement is negative, I'm thinking it may get cut in half or more. So 5 or so on the downside.

  13. The news is negative, and as predicted trading is halted today. But with expiry tomorrow, won't there be some lawsuits if they try to halt trade tomorrow, with the binary event past, and no distinct reason to assume a share price difference between fridays open and mondays?
    They would be essentially wiping out all of July's options. A Lot Of Options. Perhaps to the benefit of some, but not me. I did a OI check and Puts outnumber Calls 4 to 3
    (I'm already looking for a lawyer)

  14. First, I think you're fine. It should open (hopefully), no problem. Second, skip the lawyer, they can't do anything about it. Save the legal fees in my opinion. Thankfully, I still believe number (1) above; you should be fine in terms of being able to close positions. Good luck to everyone (is that possible?)!