Wednesday, January 25, 2012

Human Genome Sciences (HGSI) - Large Leveraged Bullish Bet in Small Cap Bio-tech Pushes Skew

HGSI is trading $9.73, up 6.6% with IV30™ up 6.7% as of ~11:10am EST. The LIVEVOL® Pro Summary is below.


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Human Genome Sciences, Inc. (HGS) is a biopharmaceutical company. The Company’s products are BENLYSTA (belimumab) for systemic lupus erythematosus (SLE) and raxibacumab for inhalation anthrax.

I noticed this stock after some massively bullish order flow in Feb. First, let’s look to the Stats Tab and Day’s biggest trades window in Livevol® Pro. Then I’ll give some color on the single trade (multi-leg) that caught my eye.

The company has already traded 600% of daily average volume and ~800% of its daily average call volume. The largest trade was:

"HGSI ppr buys 6700 Feb 11 Calls for .42, and sells 1900 Feb 8/9 Put Stupids at .66"

In English, a customer bought 6700 Feb 11 calls for $0.42 and sold 1900 of BOTH the Feb 8 and Feb 9 puts @ $0.66 (combined). That’s some bullish order flow.

That single trade doesn’t quite tell the whole story, though. Let’s turn to the Options Tab for a more holistic view.

I’ve highlighted the strikes in the trade. Note that the Feb 11 calls have traded over 15,000 times on essentially no open interest. I only see one strike in HGSI with an open interest above 6,000 (it’s below 7,000) – so the 15,000 calls today are substantially large for this issue.

Let’s turn to the Skew Tab and see price discovery in full effect.

Check out the Feb skew. While the 7, 8, 9 an 10 strikes are all below Mar (in terms of vol), the 11 strike is actually above Feb. That’s the buying interest on that line pushing the vol up and creating that upside skew. All of the OTM calls from $11 and up are priced to higher vol in Feb than the next two months. The Mar options are priced to higher vol than Feb for the ATM strikes because of an earnings announcement due out in late Feb or early Mar but AFTER Feb expiry (that's just a projection).

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

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. I will say that on the stock side, we can see HGSI was in the low $20’s not too long ago, but has seen a rather abrupt and disturbing drop by nearly 60% over the last six months. On the vol side, we can see that the implied is now trading above the two historical realized measures – but only because of today’s action. The 52 wk ranges in stock price and IV30™ are:

[$6.51, $30.15]
[34.10%, 129.94%]

The current IV30™ puts it in the 51st percentile (annual) – so right about perfectly in the middle.

This is trade analysis, not a recommendation.

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