Thursday, June 7, 2012

Edwards LifeSciences (EW) - Compelling Vol Opportunity Right Now on Bio-tech "Like" Event

EW is trading $87.94, up 1.9% with IV30™ up 2.2%. The LIVEVOL® Pro Summary is below.


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Edwards Lifesciences Corporation (Edwards Lifesciences) is engaged in the science of heart valves and hemodynamic monitoring. The products and technologies provided by Edwards Lifesciences to treat advanced cardiovascular disease or critically ill patients are categorized into four main areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems, and Vascular.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. But there's a good reason for it, and we'll examine that below. First some details on the custom scan.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated front month vol simply because earnings are approaching.

Oddly, though I try to remove bio-techs from scans (unless I'm specifically scanning for bio-techs), this one kinda has the bio-tech flavor. Let's look to the Skew Tab (below), and then examine the news.

We can see how elevated the front expiry vol is to the back two months. Obviously there's a vol event expected to occur before next Friday's expiration. Here's a news snippet from Briefing that incorporates both the news and an opinion on direction:

6-7-2012: Edwards Lifesciences target raised to $103 at Canaccord Genuity (87.79 +1.45)

Canaccord Genuity raises their EW tgt to $103 from $93. They think the two-year Cohort A results of the PARTNER transcatheter heart valve trial convincingly demonstrated that transcatheter aortic valve implantation is non-inferior to surgical aortic valve replacement in high-risk patients with severe symptomatic aortic stenosis. They expect the June 13 FDA Panel to vote in favor of SAPIEN and believe final FDA approval could come by October. If approved, they see upside to 2012 and 2013 revenue expectations and significant EPS upside in 2013 due to high operating margins.

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They key there is the June 13th FDA panel. That's the vol event. So far nothing terribly interesting, but when I looked at the Charts Tab (six months, included below) my attention was grabbed.

On the stock side we can see that the price can gap on known volatility events (read: news). In the recent past that news has been earnings. The stock gapped down on 2-3-2012 (earnings reported 2-2-2012 AMC) from $80.67 to $71.54 (close-to-close) or down 11.3%. A similar move, but in the opposite direction, occurred off of the earnings report on 4-24-2012 AMC. The one day move from the 24th to the 25th was from $73.33 to $81.84 (close-to-close) or up 11.6%.

OK, so what? Well, with expiration fast approaching the IV30™ is vastly weighted to the second month. Just look at that number in the overview section -- 35.94%. That's it? The stock has a recent history of gapping (up and down) on earnings reports and this FDA panel thingy seems like it's similar to an earnings report but with a high likelihood of a definitive(ish) result. So, I think of it as an earnings report where there is a greater than 50% chance of either a big earnings miss or earnings blowout. That's worthy of some vol... Look at Jun -- ATM is ~60% vol which would be an annual high in IV30™.

--- SUMMARY --
Finally, let's look to the Options Tab (below).

Across the top we can see the monthly vols are 57.74%, 34.70% and 34.84% for Jun, Jul and Aug, respectively. The HV180™ is 37.77%. I like to think of that as the long-term actual vol. Given that HV180™ is ~38% and Jun vol is ~60%, isn't it odd that Jul is priced to 34.70%. No? OK, how about this... Aug has an earnings cycle in it as well as this FDA panel thingy and is priced to just 34.84%. I find these vol numbers quite interesting (if not perplexing).

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