Monday, April 16, 2012

Endocyte (ECYT) - Stock Doubles in a Day, But Did Someone Know? The Science Art of Reading Order Flow Before an Event

ECYT is trading $7.81, up 105.6% with IV30™ up 32.3%. The LIVEVOL® Pro Summary is below.


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Endocyte, Inc. (Endocyte) is a biopharmaceutical company. The Company is engaged in developing therapies for the treatment of cancer and inflammatory diseases. Endocyte uses its technology to create small molecule drug conjugates (SMDCs), and companion imaging diagnostics. Its SMDCs target receptors that are over-expressed on diseased cells, primarily to healthy cells

This is a note that examines order flow -- one of the most misused and over diagnosed trading signals in the options market. Let's take a close look at how option order flow can be protected, hidden, anonymously and electronically negotiated and ultimately, how finding information inside of it is close to impossible when its information is hidden appropriately.

Let's start with the news today:

(Reuters) - Endocyte Inc said Merck & Co Inc had acquired the development and marketing rights of its experimental cancer drug, the latest in the string of licensing deals by the No. 2 U.S. drugmaker to beef up its cancer drug pipeline.

Shares of Endocyte, which had a market capitalization of about $136.18 million before the deal, more than doubled in value to $8.20 in early Monday trade. The stock was the biggest percentage gainer on the Nasdaq.

Endocyte, which is responsible for a majority of the funding and completion of the ovarian cancer trial, will receive $120 million in cash and up to $880 million in milestone payments.

"We also believe that this transaction definitely cracks the door open for an eventual acquisition by Merck, if they like what they see in the next couple of years ...," Cowen and Co analyst Simos Simeonidis said in a note to clients.

Source: Endocyte soars on cancer drug deal with Merck

Let's look to the Charts Tab (six months), below, for a quick guide to the stock movement of late. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

12-13-2012: Stock drops 65% from $10.29 to $3.57.
In addition, the blinded independent review committee and numerous sensitivity analyses confirmed the robustness of the progression-free survival results, particularly in the FR patient population, patients whose tumors are all positive for the targeted folate receptor. The overall survival results were inconclusive as the trial was not sufficiently powered to show an overall survival advantage and there was no trend toward benefit in either arm. The primary endpoint of the open-label PRECEDENT trial was PFS based on investigator assessment. Sensitivity analyses demonstrated these results were robust when adjusted for a variety of potential imbalances. The IRC assessments shared a high level of agreement with investigator assessments, confirming investigator-assessed progression for 74 percent of all patients. The PRECEDENT trial was not statistically powered to show a survival advantage and the results of the trial did not indicate a trend toward benefit in either arm.

Source: Provided by (

3-14-202: Stock rises 58% from $3.72 to $5.89.

NEW YORK (AP) -- Shares of Endocyte Inc. skyrocketed Wednesday after the company said it is close to restarting a clinical trial of an experimental cancer drug, as well as filing for conditional marketing approval in Europe.

THE SPARK: After the market closed on Tuesday, Endocyte said it will resume enrolling patients in a late-stage trial of its drug EC145 during the second quarter. The study is designed to compare EC145 to the chemotherapy drug Doxil as a treatment for ovarian cancer. Enrollment stopped because of a shortage of Doxil, and the company said Tuesday that the Food and Drug Administration will allow it to import the drug for use in the trial.

Endocyte also said it will ask European Union regulators to grant conditional marketing approval to EC145 and its imaging agent EC20.

Source: AP via yahoo Finance! -- Endocyte jumps on plans for cancer drug candidate

OK, so we have the news out of the way... let's focus on order flow and some of the rather fine intricacies. First, let's look to the Options Tab as of today, below.

I've highlighted two Apr calls -- specifically the OI in the Apr 5 and 7.5 calls. This firm averages 158 calls traded a day and the combined OI in those two represents 71% of total call interest. The Apr 5 and 7.5 calls are up and 5700% and 1100% on the day, respectively. So, in English, I'm focusing on those calls because they're up size and had huge positions in them relative to the rest of ECYT options.

I can see that the OI in the Apr 5 calls went from 141 to 488 on 3-8-2012, so the OI started to expand based on trades made on 3-7-2012 (OI adjusts the day after). Of course, that OI has gone all the way to 1,666. I've included the Time & Sales Tab from Livevol® Pro for those calls on that day, below.

While some of the order flow traded on the offer, there are other pieces that traded on the bid. A casual observation would be that the flow was two sided (buyer and seller initiated). I'm going to show you two ways that order flow analysis based solely on the NBBO can be misleading.

Let's start with a rather simple illustration, and then move to one of the finer points in option trading. First:

Since the NBBO at the time of the trade was $0.30 x $0.35, a $0.30 trade price looks like a sale. But, looking to the BBO per exchange, we can in fact see that the NBBO was likely $0.05 x $0.35 right before the bid came in. So, in English, a buyer went bid one tick below the offer which looks like a sale to the casual observer but is rather simply paying slightly less on a $0.30 wide market for options that were worth $0.20 to mid-market.

There's a deeper way that option prices are negotiated without a broker, without knowledge of the counter-party and without any verbal correspondence. It's a language that market takers use to communicate with market-makers. Let's look at one of those -- this is in the Apr. 7.5 calls.

In this case, we again see an NBBO of $0.30 x $0.35 and a trade price of $0.30. One of two things happened here, as far as I can tell:

Efficient Communication: The market maker(s) knew a buyer was out there, and signaled that a $0.35 sale could be had for small (15 @ $0.35). The market taker wanted to pay $0.30 for size (256 lot). This is a completely anonymous electronic negotiation. Ultimately the $0.30 bid was hit for 244 contracts.

Market Manipulation: A more sinister possibility is that the bid and offer were from the same party. If the buyer is $0.30 bid, but no one will bite, that same party may bring down the bid, lower the offer (for small size), wait a little while, then put a size bid one tick below that offer in hopes that someone hits it, or even more tricky, forces an auto-trade for all the system that are based on a theoretical value that uses mid-market.

In this particular case, I can see the NBBO right before the trade was in fact $0.20 x $0.40. Then the offer was lowered to $0.35. Then a $0.25 bid came in, no action. That bid was dropped, leaving a $0.20 x $0.35 market. The bid was raised to $0.30, and the offer moved to $0.40. Still no action in the bid, the offer was dropped back to $0.35, and finally, the $0.30 bid was hit (110x here, and 134 more right after). I've included the sequence below in actual quotes, which is probably easier to follow.

The point here is simply that order flow is far more complex than looking at the trade price and the NBBO. Trying to read order flow is fine (though difficult), but it's not a trivial endeavor.

Ultimately, I do see rather large (relatively) call buyers in the Apr 5 calls before the 3-14-2012 news that held onto the position through today. Now I see some sellers @ $2.70 (offering down from an NBBO right before of $2.65 x $2.90). The Apr 7.5 call opening orders came after the 3-14-2012 news, so that's likely spec rather than any kind of insider knowledge. Order flow may have tipped to some forward looking information in the Apr 5 calls (ya know, or not), but it was hard to read.

This is trade analysis, not a recommendation.

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