Monday, October 24, 2011

Targacept (TRGT) - Vol, Vega, Probabilities, and Bio-tech Events

TRGT is trading $17.28, up 6.7% with IV30™ down 5.6%. The LIVEVOL® Pro Summary is below.


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Targacept, Inc. is a biopharmaceutical company engaged in the design, discovery and development of neuronal nicotinic receptor (NNR) Therapeutics for the treatment of diseases and disorders of the nervous system. Yeah... a bio-tech... Sup?

With a relatively uninteresting market today in terms of vol moves, this company caught my attention b/c of the rocketing vol into a phase III trial / results / stuff 'n stuff. Here's some news from Briefing:


Targacept's lead program, TC-5214, is being co-developed with AstraZeneca (AZN) and is in Phase 3 clinical trials as an adjunct treatment for major depressive disorder. Phase 3 data is expected in Q4... On 10/6, Ladenburg said they expect TC-5214 to be safe and to generate efficacy data comparable to approved adjunctive MDD drugs.

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Let's turn to 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 is down over the last 6 mos, but really, it's the vol chart that's extraordinary. IV30™ is now over 200 and also very interesting, the front two months ATM vol are nearly identical. An event is due out, and the option market reflects the uncertainty both in the outcome and the timing. Very cool...

Let's turn to the Skew Tab, below.

We can see that the option markets reflect a vol event within the next two expirations but certainly before the Feb '12 cycle. That makes option trading in this one risky based on outcome and timing -- both of which are substantial risks.

Let's turn to the Options Tab for completeness.

How do you like those vols in Nov and Dec? The ATM (17.50 strike) is priced within 0.50 vol points of each other -- very unusual. In fact, so unusual that I'm not going to say anything else so no one blames me for... ya know... anything... 

One question though:  What do the equal vols mean about the implied probability of an event in Nov?  In Dec?  If the event is in Nov, isn't it in Dec too?  If the event is in Dec, isn't it not in Nov? Ok, that was a lot more than one question.

Possible Trades to Analyze
Please be careful... This is definitely rip your face off vega if you're long, and rip your face of gamma if you're short. So, try to keep your face on.

This is trade analysis, not a recommendation.

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