Friday, January 21, 2011

NPS Pharma (NPSP) - Betting on a Bio-tech

NPSP is trading $7.23, down 2.5% with IV30™ up 0.2%. The LIVEVOL® Pro Summary is below.


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NPSP is a biopharmaceutical company focused on the development of new treatment options for patients with gastrointestinal and endocrine disorders and medical needs.

I believe that NPSP is scheduled to report Phase III data on the a drug candidate in Q1 of this year.

The company has traded over 9,500 contracts on total daily average option volume of just 1,074. The action is in May - right before some clinical data is supposed to surface. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. It looks like sales of the May 5 and 6 puts and purchases of the May 10 calls.

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

I love the Aug skew shape - looks like fun to trade if you have any convictions as the vols are all over the place.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock can do a little bit of the "up-down-up-down" game. The IV30™ is absolutely exploding as the news doesn't seem to have an absolute "due date," other than the first quarter of this year.

Possible Trades to Analyze
I'm not going to list any specifics, but here are some ideas to explore.

1. Bet that Feb vol is too high and that the news comes out after Feb 18th. Note that the option market reflects that the news will be out in the Feb cycle. This type of bet involves calendar spreads, buying "depressed" May vol and selling "elevated" Feb.

2. Bet with order flow. Check out some call spreads where the vol in the higher strike is above the vol in the lower strike (if possible).

3. Bet on a small move relative to the option implications. Sell the meat (ATM straddle or strangle) and purchase an OTM strangle to cover. Don't do it naked, please.

4. Bet on a big move. Buy a cheap (ish) OTM strangle and hope for crazy news which is definitive (i.e. very good or very bad).

This is trade analysis, not a recommendation.

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