Saturday, February 1, 2014

Furiex Pharama (FURX) - The Event is Coming... But the Option Market is Totally Confounded.

FURX closed Friday trading at $46.36, up 0.7% with IV30™ rising 6.8 points or ~3%. The LIVEVOL® Pro Summary is below.

Provided by Livevol

Furiex Pharmaceuticals, Inc. is a drug development collaboration company. The Company’s product pipeline includes two marketed products and three programs in development, including late-stage compounds, in multiple therapeutic areas.

This is a volatility note (on several fronts) in a small bio-pharma company with 24 employees, a $480MM market cap and some very big news apparently coming out in the next few weeks (or less).

I found the company using the optionsXpress® Dragon Tooolbox Stock with High IV/HV ratios (giving this platform a shot for idea generation) and have included the results of that scan below:

Provided by optionsXpress

The goal with this scan is to identify companies with events approaching where the option market reflects substantially more risk moving forward than the stock has realized in the last 30 day.  And oh yeah, FURX qualifies with an implied vol over 200% and a historical vol of just 36%.

Let's start with the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see that two the stock hit a low of ~$12.50 and a high of $49.50 in this time period, and now sits very close to that high at $46.36.  More importantly, check out all of those huge stock moves over the last two-years which I have highlighted in yellow.  So, yeah, this stock behaves like a 24 person small cap bio-pharma with drugs in development stage should be reacting... With great volatility.

But this is a volatility note, so let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can a rather obvious climb in the implied which was trading at ~50% in December and is now trading at 214.34%.  Hi, I'd like some risk please...

Without doing a lick of research, it's obvious an event / news is due out that could substantially move the stock price.  This is the first phenomenon of this volatility note, and it's "normal" in the sense that these events are the life blood of development stage drug companies.

But there's a little more going on, and it's easy to miss unless you examine the skew.  So, let's...

The Skew Tab is included below.

Provided by Livevol

Two things pop out:

1. The front month (red curve) is elevated to all the rest of the expiries, so this event is expected to occur before Feb expiry (Feb 21).    Given the ripping volatility, it feels like the event is due out sooner rather than later in that time frame.

2. Check out those skew shapes.  Each expiry reflects the same risk, which is... well... totally agnostic.  The skew curves are essentially flat, with the at-the-money (ATM) options priced to the same risk (volatility) as the out-of-the-money (OTM) options.  So what?...

This is actually irregular on two counts.  First, when a company like this has big news, the skew is normally parabolic -- meaning greater risk to the upside and downside than the ATM options.   A great example of parabolic skew can seen in the 3-D printing company SSYS.  I've included that skew chart, below:

Provided by Livevol

Clearly FURX skew does not look parabolic. To read more about option skew and why it exists, you can read the post below:
Understanding Option Skew -- What it is and Why it Exists

So what does all of this mean?...

The option market reflects two things:
1. Exploding overall risk (see that IV30™ chart) into totally uncharted territory.
2. A remarkably agnostic view on the direction of the stock move off of the news coming for FURX.

Why does this matter?
1. If you have a position in FURX equity, get ready for the possibility of a massive move.
2. If you have a position in FURX options, the standard position in bio-pharmas pre-announcement isn't available (the standard position with a parabolic skew buys the low volatility (the ATM options) and sells the high volatility (the OTM options)).
3. It could also signal that the OTM options are too cheap and that FURX could be due for a much larger move than that 45% number.

So, this is a very difficult trade to find any kind of edge purely from a volatility stand point.

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

Provided by Livevol

Across the top we can see that Feb vol is priced to 232.56% and Mar is priced to 175.88%.  That's the pretty conclusive (albeit circumstantial) evidence that the event is coming soon (i.e. in Feb expiry).  In terms of the expected move, the $45 strike straddle is the ATM and is priced to ~$20.  So... the option market reflects a ~45% move in the stock within three weeks.

Here we go...

This is trade analysis, not a recommendation.

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