Monday, November 15, 2010

Human Genome (HGSI) - One Last Look Before FDA Decides, Tomorrow

HGSI is trading $25.11, up 6.4% with IV30™ down 2.6%. The LIVEVOL™ Pro Summary is below.


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I wrote about HGSI last Wednesday. You can read that here:
Human Genome (HGSI) - Huge Bio-tech Vol, Trades into FDA Review

Bottom line, the FDA result should be out tomorrow or Wednesday. Here's the update on the "review."
Federal health officials said Friday that the first new drug developed to treat lupus in decades relieves disease symptoms, but they questioned the significance of its benefits, which varied across difference patient groups.

Human Genome Sciences is asking the Food and Drug Administration to approve Benlysta to relieve symptoms of lupus, a difficult-to-treat ailment in which the body attacks its own tissue and organs. If approved, the drug which is being codeveloped with GlaxoSmithKline would be the first new lupus treatment in about 50 years.

Two of three studies submitted by the companies show Benlysta improved patients' scores on a test that measures lupus systems.
However, FDA reviewers raised a number of questions about the strength of Benlysta's effect in briefing documents posted online Friday.
"The robustness and the clinical meaning of the efficacy findings warrant discussion," states the FDA review.

Regulators pointed out that African American patients actually appeared to fare worse when taking the drug. Reviewers were also concerned that the drug's benefit appeared greater among patients studied in Latin America, compared with those from the U.S. and Canada.

The FDA will ask a panel of outside experts about these discrepancies and also to vote on Benlysta's safety and effectiveness at a meeting next Tuesday. The FDA is not required to follow the group's advice, though it often does.

Panelists will also likely discuss the longevity of Benlysta's effect.
In the companies' studies, patients taking Benlysta had significantly fewer lupus symptoms after one year compared with those taking a placebo injection. However, follow-up studies have shown that after 76 weeks, patients taking Benlysta do not fare significantly better than those taking a sham treatment.

Despite the somewhat critical review from the FDA, most analysts believe Benlysta will win approval from the FDA, simply because there are so few options for Lupus patients.

Hmmm. Dunno what to say about that, but I really like the word "sham." No idea why AP used it, but it reminds of the "shammie" and long nights watching infomercials.

On Wednesday, "back of the envelope" analysis of the options markets had the same (ish) odds that HGSI would go below $17.5 and above $28. Let's look to the Options Tab now.

With the stock trading at $23.75 last Wednesday, the Nov 15 puts were $0.90 bid. Now the stock is ~$1.40 higher and those same Nov 15 puts are $1.30 bid. Whoa...

But, the Nov 30 calls were $0.70 bid, and today they are $0.95 bid. Moving on a 25 delta, those calls should be worth $1.05. I'm not really interested in the time decay as this is all about "one day."

All in all, the option markets reflect a slightly more bearish outlook. But, still, the Nov 17.5 puts and Nov 28 calls are priced the same.

Let's look to the skew right now (below).

It looks about the same as the skew on Wednesday, though vol is higher (as it should be). I do note a slightly less upside bid skew now - so slightly less likelihood of upside priced in.

Possible Trades to Analyze
1. If you think this will not move big, like some news that's sort of "inconclusive" or asks for more info but isn't overly optimistic or pessimistic:
Sell the Nov 25 straddle @ $8.00
Buy the Nov 20/30 strangle $3.60
Net credit of $4.40 yields a MaxGain:MaxLoss 7.33:1. It requires HGSI stay in [$20.60, $29.40]. Back of the envelope log-normal returns, using ATM vol as 390, there's about 33.3% chance the stock stays in that range.

2. Bet on a big move:
Buy the Nov 25 straddle for $8.10
Sell the Nov 15/32 strangle @ $1.70
Pay $6.40. MaxGain:MaxLoss 0.56:1. Profit range is stock <= 18.60 and >= 31.40. Using the same assumptions for probabilities, there is a 52.% chance the stock is outside that range (i.e. the strategy wins).

If that seems high to you, then you're probably selling the meat and buying the wings. If that seems low to you, then you're probably buying the meat and selling the wings.

The rule of thumb which is worth very little, lol, is to buy meat sell wings, but, ya know, that rule ain't worth a lot probably.

3. Other trades:
Depending on your analysis of the top two and how you fall as a meat seller or buyer, look for similar set ups using different strikes, maybe even Dec.

This is trade analysis, not a recommendation.

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  1. Ophir,

    Can you explain how you get the probabilities of 33% and 52%?


  2. Use a log normal distribution for retruns and the ATM vol as the standard deviation.