Monday, August 23, 2010

Chelsea Therapeutics (CHTP) - Trading a Bio-tech With News

CHTP is trading $4.17 with IV30™ up 12.0%. The LIVEVOL™ Pro Summary is below.

Here's what's up (source: 8-13-2010: Seeking Alpha):
CHTP latest stage drug is Droxidopa which is currently in two pivotal phase 3 trials for the treatment of Neurogenic Orthostatic Hypotension. They completed one phase 3 trial last year, which missed the primary endpoint, yet did very well in other endpoints. This caused the stock to drop from ~$7.50 to ~2.80s. Chelsea then announced they were going to meet with FDA to discuss changing the primary endpoint in their second phase 3 trial – the FDA said yes, and Chelsea changed the primary endpoint of Study 301 to an endpoint that had previously demonstrated a statistically significant improvement in NOH patients.

And more recent news (source: 8-19-2010: Yahoo! Finance):
Chelsea Therapeutics International, Ltd. (Nasdaq:CHTP - News) announced that a new investigator-led phase II clinical study of Droxidopa, an oral synthetic precursor of norepinephrine, has been initiated in chronic fatigue syndrome (CFS).

The company has traded over 10,000 options on total daily average option volume of just 505. The largest trade was an Oct 2.5/5 strangle sale @ $1.575. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that both sides are opening as this is the first day of Oct options for the stock.

Note the vols by month along the top. Sep is 132 while Oct is 210. Clearly the option market implication is that news is most likely do out in Oct (though some believe Sep and others Dec from news I've read).

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

What's notable here is that the skew looks normal. Usually we see a parabolic skew in bio-techs were the upside and downside (wings) are very expensive relative o the ATM.

Finally, 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 see the stock rip of late on news from 8-17-2010 that a competitor drug, (Midodrine - currently the only FDA-approved drug for Orthostatic Hypotension) which has both label and generic versions, may be pulled by the FDA. You can read about this development here from Seeking ALpha: Chelsea Could Benefit From FDA Proposition.

We can see the IV30™ (red line) is perpetually above the HV20™ (blue line) which means in the past, a sale of vol has been a winner repeatedly. Now that trials are coming due, that feels a bit scary. The strangle sale trade wins at expo if the stock is in ($0.93,$6.57) which is a pretty fat range. The highest "potential value" I've seen for this stock is ~$20, though most have been in the $7 range. Back in Sep of 2009, the stock collapsed from ~$7 to below $3 (which is well above $0.93).

I see very limited downside risk to the strangle sale (duh), upside, don't really know. A $0.35 purchase of the Oct 7.5 calls seem like a reasonable hedge. That would leave the PnL range at Oct expo in ($1.28, $6.22). I like that.

Alternatives can be to purchase the Sep 7.5 calls for $0.10 in hopes that you can purchase the Oct 7.5 calls later for less than $0.20 (not likely). You could sell some Sep "hoping" there really isn't any news in Sep. That's a tough decision - the Sep vol is elevated enough that a sale collects some decent premium... but, it's elevated b/c the some big news might come out early (I guess).

My general opinion in bio-techs is that it's just coin flipping against someone else that knows which way the coin is shaved...

This is trade analysis, not a recommendation.

Legal Stuff:

No comments:

Post a Comment