Wednesday, November 10, 2010

Human Genome (HGSI) - Huge Bio-tech Vol, Trades into FDA Review

HGSI is trading $23.75, down 1.7% with IV30™ up 2.3% and FDA news due out Friday and Wednesday. The LIVEVOL™ Pro Summary is below.


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For those that don't know, here's the news:
The U.S. Food and Drug Administration advisory panel meets Nov. 16 and will vote whether or not to recommend Benlysta's approval as a treatment for lupus, an autoimmune disease that has gone 50 years without a new, effective therapy for affected patients.

The FDA is expected to post online its own review of Benlysta on Friday, Nov. 12, in advance of the FDA panel meeting. That review will be available for FDA web site.
Source: Human Genome: Benlysta FDA Panel Preview

Let's look at the Charts Tab first. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

The stock has dropped of late - there is some news about another drug that I believe they are just dropping. Something they were working with another large pharma on. But the really interesting thing here is the vol.

The IV30™ looks like a stock chart from 1998 in a .com. Straight up... a lot.

The Skew Tab snap (below) illustrates the vols by strike by month.

Note the term structure - with Nov well ahead of Dec and Jan'11 (as expected). The options market has clearly priced in a very high probability that the news is coming out in this options cycle (Nov) and all news points to that being correct. There is always a chance of a surprise though... just sayin'...

Finally, let's look at the Options Tab (below).

I have only included Nov so it will fit in the screen, but don't take that as opinion on Dec, this is just for convenience.

Ok, here we go...

Possible Trades To Analyze
The market is reflecting equal likelihood that the stock is above $28 as it is below $17.5 (just lookin' at option prices). The ATM straddle is worth ~ $7.40, or [$16.35, $31.15] in stock price for a one standard deviation move.

1. If you want to make a play that sells elevated vol, but has a nice tight max loss, try this:
Sell 1 Nov 24 straddle @ $7.35
Buy 1 Nov 21/27 strangle for $4.65
That's a net credit of $2.70, with a max loss of $0.30. The PnL chart for this guy is included below.

We can see this has a MaxGain:MaxLoss of 9 to 1, risking $30 to try to make $270 (or so). The fact that this payout is so large tells us that the likelihood of the stock staying in this range is low - again, one std deviation pushes the range to above $31 and below $17, so... ya know...

2. The same trade above, but using the 20/28 strangle gets you a wider range where the trade wins, but costs ~ $0.45 (instead of $0.30).

3. If you're tricky, it looks like the Nov 24 straddle can be sold for exactly $1 more than the Nov 23/25 strangle which would leave no risk (other than pin risk), but of course, commissions will eat into PnL and the likelihood of the stock staying in that range is essentially reflected as nil. If you can do this trade for a credit though, hmmm....

4. If you're ok with some naked downside risk, a Nov 17.5/15 1x2 put spread (buy 1 Nov 17.5 puts, sell 2 Nov 15 puts) for a total credit of ~0.35 leaves a winning trade unless HGSI blows through $12.5... which is a possibility. This thing could be single digits hypothetically.

5. Call spreads and put spreads are "ok", but they feel pretty expensive. It really is just a naked delta bet, covering some long premium with a sale. Not overly enthusiastic about this trade.

6. Sometimes to get some upside but save the pain of long premium , this trade is interesting:
Sell 1 Nov 25 call @ $2.90
Buy 1.5 Nov 27 calls for $1.95

Total debit is $0.025 (so essentially an even trade). This gives a nice upside if the stock really moves up, yields very limited downside if the stock goes down, but is a big loser if the stock goes to $28 and sits there.

I actually don't like this trade this time, it requires the stock to go too high for a win to the upside. This trade is my least favorite, by a lot.

If you trade this thing, note that it's a gamble, not an investment and hedge appropriately. I'll try to update this post once the results and stock reaction are out.

This is trade analysis, not a recommendation.

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  1. Hi,

    Trade #6, says to buy "1.5" Nov $27 calls, did not know you could by a .5 call,
    Le me know,


  2. Hi,

    Trade #6 says to buy "1.50" call, could you please explain?

    Did not know that you could buy a 1/2 call,



  3. Hi Edgar,

    I meant on a ratio. So, in this case:

    2:3 would be the smallest trade size... then:

  4. Implied vol above 550!
    Nov 12.5 Puts 0.81 bid with stock at 25.2
    B/E below 11.7, so stock has to drop more than 53% to lose.