Friday, March 21, 2014

MannKind (MNKD) - Biotech Event is Coming & You May Not Agree With What Option Market Reads

MNKD is trading $5.82, down small with IV30™ up 1.1%. The Symbol Summary is included below.

Provided by Livevol

This is quite simply a biotech event note.  One of the more interesting happenings in the option market, so let's dive right in.

Let's start with the Charts Tab (two-years) is 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 price has ranged from as low as ~$1.60 to as high as $8.70; welcome to the world of baby biotechs.

But it's the volatility that has my eye, so let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can see the explosion of the implied as of late -- it's at totally unprecedented levels over the last two-years and that means: Big Event Coming.

While some research needs to be done as to what the event is, I actually don't care... rather I care more about when the event is. Let's turn to the Skew Tab snap (below) .

Provided by Livevol

We have to get careful with this one, so let's look at the weeklies.  We see that the 4 weeklies have the highest volatility across all strikes and that means the option market reflects the event in that expiry. I also note, which is odd, that MNKD has "normal" skew.  Yeah, "normal" is weird right now.

Generally when a baby biotech has a huge event, the skew turns parabolic to reflect two tailed risk.  In this case the option market reflects lower upside risk (potential) than downside.  So, either the option market has it right, or, if you're agnostic about the move, the OTM calls are cheap relative to the other options.

Note that I write "relative."  These options are by no means "cheap" without relative comparison.

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.

Finally, the Options Tab is included below.

Provided by Livevol

Across the top we can see the vols by expiry (green font) and we they read:

Mar28(W): 230.80%
Apr4(W): 366.77%
Apr11(W): 314.96%

If the event is actually after Mar 28th and before Apr 4th, those Mar28(W) options are crazy expensive.  But... just because an event is planned for a certain date, does not preclude news about the result from coming out earlier.  That's the trick with these biotechs... the "preliminary and unplanned" news can be the whole kit and kaboodle.

So, we'll see... Either upside options are underpriced and Mar28(W) is over priced, or... ya know... not.

This is trade analysis, not a recommendation.

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  1. what is you assessment of April 19 options?

    1. Priced for the event. No real skew shape difference. So, same risk profile.

  2. The FDA advisory committee meeting is on April 1, but the briefing documents for the meeting, which can be a good indicator of FDA sentiment, come out on March 28.

  3. $ECYT and $MNKD follow an almost parallel trend line - not exactly parallel, just "almost parallel."