Thursday, February 27, 2014

Insmed (INSM) - Biotech Has Huge Event Coming.. But When? If you Know That, Then You Have a Play.


INSM is trading $20.66, up 5.6% with IV30™ up 3.2%. The Symbol Summary is included below.

Provided by Livevol

Insmed Incorporated is a biopharmaceutical company focused on patients suffering with lung diseases through the development and commercialization of targeted inhalation therapies.

As an aside, INSM is in the Small Cap Biotech Index I constructed.  You can see the latest update on that index here: Daily Biotech Small & Micro Cap Update

There's clearly a large volatility event coming out for INSM, and although earnings are lurking in the near future, it feels much bigger than that.  Instead of looking up the event itself in the news (which I imagine is relatively easy), I want to take an agnostic view by simply studying the volatility -- what do the options say?...

Let's start with the Charts Tab (two-years) 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 the nice price appreciation from the high $2 range a couple of years ago to now over $20... Wow. We can also see that the stock is moving back up to that multi-year high it just set a couple of months ago.

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

Provided by Livevol

Note how high the implied has reached and how quickly it has climbed.  This was a ~58% IV stock in Sep, and now we see an IV30™ of over 185%.  So... something is coming... Now "something" isn't unusual for small cap biotechs, actually, it's pretty "normal."  But, there's one interesting phenomenon here we should look at.

Let's turn to the Skew Tab, below.

Provided by Livevol

We can see that Apr vol (the yellow curve) is elevated to Mar vol (the red curve) for all strikes.  OK... So that means the option market reflects greater risk in Apr than Mar, or in English, the "event" is due out in Apr... right?...

Actually... maybe not...

To read more about option skew, what it is and why it exists, you can read the post below:
Understanding Option Skew -- What it is and Why it Exists


If we look a little closer at the vol levels what we'll see is a projection of greater risk in Apr than Mar, but some fairly substantial uncertainty.  Let's turn to the Options Tab to see that in detail.

Provided by Livevol

Across the top of that image you can see the monthly vols (green font) are priced to 179.66% for Mar and 197.11% for Apr.  This is weird...

Apr shows higher risk reflecting the likelihood of an event (as we saw in the skew), but why is Mar so elevated?  Is it earnings?... Well, in the Charts Tab (look to the Charts Tab a few images above) we can see that the blue "E" icons represent earnings dates.  The IV30™ has never been as high as right now and never been as high as the vol in Mar.

So what?...

It seems that there is an event due out, but the final delivery date of that news is a bit of a toss up... Is it in Mar or is it in Apr?  If it's in Apr, then spreading long Apr options against short Mar options could be a gigantic winner.  But... if they event is in Mar, that same spread (which is long vega and short gamma) could get crushed if the stock moves abruptly in Mar (PnL gets killed by short gamma) and the vol in Apr will collapse (PnL gets killed by long vega).

Quite a risk... Quite a reward...

This is trade analysis, not a recommendation.






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7 comments:

  1. trade august (lower IV) vs. april or march?

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  2. A calendar spread gets long vega and short gamma. With a biotech we expect a big stock move (so short gamma is dangerous) and a vol crush after the news (so long vega is dangerous).

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  3. thanks. so same as april long vs march short.

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  4. well, here's where it's tricky... if the event is in Apr, that could be a very good trade -- that assumes the stock doesn't move a lot so short gamma doesn't lose money and with the event still due out, the long vega doesn't lose either. Quoting the blog:

    "It seems that there is an event due out, but the final delivery date of that news is a bit of a toss up... Is it in Mar or is it in Apr? If it's in Apr, then spreading long Apr options against short Mar options could be a gigantic winner. But... if they event is in Mar, that same spread (which is long vega and short gamma) could get crushed if the stock moves abruptly in Mar (PnL gets killed by short gamma) and the vol in Apr will collapse (PnL gets killed by long vega)."

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  5. Thanks, again. Not to belabor it, but I'd noticed how relatively low the IV of INSM's August calls is relative to March and April. Being bullish on the stock longer term, wondered about paying for relatively cheap OTM August calls by selling expensive OTM March (or April) calls. Enjoy your blog which I just came across today.

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  6. Hello I saw lots of activity in the march calls this week. Based off the updated open interest, do you believe news will hit either this upcoming week or does it still look like a toss up?

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    Replies
    1. Gonna blog on it Monday but it does seem that the event may happen in march. Still very much I'm the air

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