Thursday, November 7, 2013

Geron Corporation (GERN) - Bio-tech Results Explode Stock Up 60%; Did Someone Cheat to Make Millions?

GERN is trading $5.68, up 57.8% with IV30™ down 46.6%. The Symbol Summary is included below.

Provided by Livevol

Geron Corporation (Geron) is a clinical-stage biopharmaceutical company developing a first-in-class telomerase inhibitor, imetelstat, in hematologic myeloid malignancies. Telomerase is an enzyme that enables cancer cells to maintain telomere length, which provides them with the capacity for limitless cellular replication.

This is an order flow note, the bad kind...  Someone(s) seems to have accumulated substantial position in Nov calls in a very short period of time just ahead of the news.  And what was the news?...  Here we go:

What: Shares of biotechnology company Geron  (NASDAQ: GERN  ) gained as much as 116% this morning after its experimental bone marrow disorder drug helped patients in a study.

So what: In the 18-patient Mayo Clinic study of Geron's imetelstat, 44% experienced clinical improvement, partial remission, or complete remission, triggering plenty of optimism over the drug's blockbuster potential. To be sure, The Street's biotech expert Adam Feuerstein noted that only bone marrow and blood responses were reported -- no clinical or symptomatic responses -- suggesting that Mr. Market might be overreacting to the data.

Now what: Geron will post updated results next month at the American Society of Hematology meeting in New Orleans.

"The current study signifies the potential value of telomerase-based treatment strategies in MF and identifies imetelstat as an active drug in that regard," the study's abstract reads. "The association between response and spliceosome mutations suggests a broader application for the drug in myeloid malignancies."

Source: The Motley Fool via Yahoo! Finance; Why Geron Shares Doubled, written by Brian Pacampara.

OK, now the order flow.  First, the Stats Tab demonstrates that over the last 90 calendar days (or ~66 trading days) GERN has averaged 3,162 calls traded a day.  Keep in mind that the average is skewed by the numbers I am about to reveal.  The true average is closer to ~2,000 calls traded per day.

Provided by Livevol

The first trade that caught my eye was a Nov 3/5 call spread purchased on 9-27-213 in the Nov options (not the Oct options).  I have included the Time & Sales Tab on that day for the Nov 3 and Nov 5 calls looking at trades greater than 100 contracts and 50 contracts, respectively.

Provided by Livevol

Provided by Livevol

So we see that 4,285 Nov 3 calls traded, 3000 of them bought for $1.05 against a sale of 3,000 Nov 5 calls @ $0.25.  So, the total call spread was purchased for $0.80, while another 1,000+ Nov 3 calls were bought naked for ~ $0.95.

Keep in mind, the true daily average is ~2,000 calls per day, so just the Nov 3/5 call spread (6,000 contracts) was 3x the total daily average volume, not to mention the 1,000+ more Nov 3 calls that were purchased.

Next I saw the Nov 4 calls.  We can see nearly 2,000 were purchased on 10-23-2013 for ~ $1.00, below.

Provided by Livevol

When we look at the Options Tab (below), we can see the hugely inflated open interest (OI) numbers in the Nov 3, 4, 5 calls.  I have highlighted the OI on the left of the image.

Provided by Livevol

So how much money was made?  Here it is.

1. 3,000 Nov 3/5 call spreads
Purchased for $0.80
Worth today: $1.80
Gain = 3,000 * 100 * $1.00 = $300,000 on a $240,000 bet or a 125% gain (225% of original investment) in six weeks.

2. 1,888 Nov 4 calls
Purchased for $1.00
Worth today: $1.80
Gain = 1,888 * 100 * $0.80 = $151,040 on a $188,00 bet or an 80% gain (180% of original investment) in three weeks.

3. The rest of the Nov 3, and 4 calls
See that OI in the Nov 3 and 4 calls: 7,787 and 7,149, respectively.  That is long interest and combined reflect more than a million dollars in gains above and beyond those already recorded in the other trades.

4. There was a ton of short interest in the puts (sellers).

So what?

Is it possible someone just took a bet on GERN and got lucky? Yeah, sure it is.

Is it possible someone had inside information on GERN and stole money from the rest of the market? Yeah, sure it is.

Couldn't this just be speculation on a known event? yes. But...

I am referencing bets placed six weeks prior, which is very rare for speculators. When an event like this has a known date, speculators will place bets the day before for several reasons:

1. Theta decay makes the options cheaper (most speculators buy options) so waiting right before the event might be cheaper.
2. Order flow before hand can either tip the hand (as it did here) or bend the skew to make creative spreads much more attractive (this is very common in bio-techs).
3. To protect oneself from buying vega and then having the event delayed (which is also very common in bio-techs). This delay crushes the long option holder as all of the volatility goes away yet the stock moving news doesn't come out.

This is trade analysis, not a recommendation.

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  1. This post is stupid. Big bets were placed both on against Geron. It was well known that the study results were going to be released today. There were actually more money betting against Geron than on it based on yesterday's put and call open interest.

  2. So, not to insult (though you seem to have no issue with it), if you read the post I am talking about bets placed six weeks prior. Puts were not trading then and that is incredibly unusual for pure speculators. When an event like this is known, speculators will place bets the day before for several reasons:
    1. Theta decay makes the options cheaper (most speculators buy options)
    2. Order flow before hand can either tip the hand (as it did here) or bend the skew to make creative spreads much more attractive.
    3. To protect buying vega when an event can be delayed which crushes the long option holder.

    I appreciate your read, your comment was that of a non-professional. It just was.