Monday, April 23, 2012

Ardea Biosciences (RDEA) - Insider Information Traded Before Takeover? You Decide...

RDEA is trading $31.58, up 51.5% with IV30™ down 68.3%. The LIVEVOL® Pro Summary is below.


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Ardea Biosciences, Inc. ( Ardea) is a biotechnology company focused on the development of small-molecule therapeutics for the treatment of serious diseases. Lesinurad, previously called RDEA594, the Company’s lead clinical candidate for the treatment of hyperuricemia and gout, is a once-daily, oral inhibitor of the URAT1 transporter.

This note unfortunately surrounds what I believe to be highly unusual trading prior to a takeover. First, there's the takeover news that has pushed the stock up over 50%:

AstraZeneca entered into a definitive agreement Monday to acquire Ardea Biosciences Inc. for $1.26 billion.

Source: Philadelphia Business Journal via Yahoo! Finance -- AstraZeneca to buy gout drug developer Ardea , written by John George.

This is a fascinating case study as the volume is very small -- nearly undetectable before the fact. But after the fact, it's hard to hide. Let's start with the set up. The company trades very lightly on the options side. A small snippet of the Stats Tab snapshot is included below.

Two points to note:

1. The company averages 27 total option contracts traded a day (20 calls and 7 puts).
2. The total OI in calls right now is 565 -- that's all open call positions on all strikes and in all expiries.

Now, let's look to the Options tab from today.

I've included just May and Oct expiries and highlighted the May 22.5 calls and Oct 20 calls. You'll notice the 187 OI in May and 220 in Oct. That accounts for 407/565 of the OI. But, still, so what, right? Here's the what... and it's a big one...

First, let's look to the montage for RDEA on Friday (so, one trading day before this news):

We can see that the May 22.5 calls had an OI of 12 -- and then 175 (nice even number) traded on Friday. If you look to the bottom of that snapshot, you can see the prices. The calls traded for $0.60 on $0.15 x $0.60 markets. Those are purchases...

Second, let's look to Thursday, or two trading days before the takeover news.

We can see that 200 (another nice round number) of the Oct 20 calls trades on 0 (zero) OI. Looking to the prices, you'll see a ~$3.30 execution price. Then looking to the NBBO, the argument becomes, "sheesh, those could be sales." No, they can't be... And here's why.

I've included two snapshots of the BBO's for those options the moment the trades were executed.

In the first image, we can see the NBBO was $2.70 x $3.50. Then a $3.30 bid came in and was hit. That's a buyer initiate trade. In the second image, the NBBO was $2.55 x $3.50, and a $3.20 bid came in and was hit. That too, is buyer initiated. Finally, looking to the first trade listed in that sequence (which is the latest trade in time), that $3.30 bid wasn't working anymore, and the trader simply lifted the $3.50 offer. In English, those were purchases, 20 lot bids up incrementally and finally lifting the offer for the 90 lot.

So, in totality, we have 75% of total call OI accumulated in call volume that equated to 1000% of the daily average trade volume two days in a row, right before the 50% takeover news. Is it possible this was "something else" other than insider trading?  Yes.  Do I think it was?  No.   I don't believe in that kind of luck.

For the record, the PnL accumulated was:

May 22.5 calls: 175 x 100 x ($9.05 - $0.60) = $147,875 (1,408%) in one trading day.
Oct 20 calls: 200 x 100 x ($12.00 - $3.30) = $174,000 (264%) in two trading days.
Total: $321,875 (421%)

This is trade analysis, not a recommendation.

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