Wednesday, January 15, 2014

Exelixis (EXEL) - Bio-tech Stock Booms, Implied Volatility Booms With It; Huge Near-term Risk & Upside May Not Be Done

EXEL closed Wednesday trading at $8.07, down 1.7% with IV30™ down 2.2%. The LIVEVOL® Pro Summary is included below.

Provided by Livevol

Exelixis, Inc. (Exelixis) is a biotechnology company engaged in developing small molecule therapies for the treatment of cancer. The Company is focusing its resources and development efforts on cabozantinib (XL184).

This is a bio-tech that was trading in the $4 range two months ago and is up ~33% in the last ~two weeks.  I found this stock using the real-time custom scan that searches for high vols relative to the short-term.  But this is also an interesting skew story.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20™ GTE 10
HV180™ - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The EXEL Charts Tab (two-years) is included below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

So we can see the stock explosion over the last couple of months; give or take a 75% rise.  Believe it or not, this was a $45 stock back in 2000 and was a $12 stock back in 2011.  In other words, this huge climb is nowhere near an all-time high.

But it's the volatility that caught my eye.  Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

The implied is at a multi-year high and has been climbing with the stock price. This is actually unusual for bio-techs, which tend to explode (or implode) in stock price off of news which eases the volatility as uncertainty lessens with market moving news.  Clearly,that's not the case with EXEL.  This is phenomenon #1 tat caught my eye.  Phenomenon #2 is more subtle, but equally interesting, if not more so.

Let's turn to the Skew Tab from today and then exactly two-months ago, respectively.

Provided by Livevol

Provided by Livevol

Note how the skew today, particularly in the Feb options (the yellow curve in the top chart), is bent upward.  The option market reflects greater likelihood of upside risk (potential) than downside risk.  This is not only "abnormal" in general, but it's totally contrary to the skew for EXEL two months ago (bottom chart).

On 11-15-2013, the skew was downward sloping -- a "normal" shape for option skew.   To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Ultimately we see two abnormalities here:
1. A bio-tech that has exploded yet volatility is rising with the move.
2. An upside skew tilt


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

Provided by Livevol

Look how high volatility is in Feb (across the top),priced to 121.37%.  Compare that to May with 98.88%.  The optionmarket reads loud and clear:

1. Huge risk right now (in both directions)
2. There might be more upside

We shall see...

This is trade analysis, not a recommendation.

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