Wednesday, April 9, 2014

Cytokinetics (CYTK) - Biotech Volatility Explodes; Event is Coming. But WTF is the Option Market Reflecting?

CYTK closed Wednesday trading at $9.90, up 11.5% with IV30™ up 9.5%. The Symbol Summary is included below.

Provided by Livevol

Cytokinetics, Incorporated (Cytokinetics) is a biopharmaceutical company focused on the discovery and development of small molecule therapeutics that modulate muscle function for the potential treatment of serious diseases and medical conditions.

This is a stock and implied volatility note on a baby biotech.  let's start with the Charts Tab (two-years) below.

Provided by Livevol

We can see the stock has been below $4 and above $14 in the last two-years.  There are gaps, spikes, splits and lots of good stuff for the lover of baby biotech madness.  But... something has changed today.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied has been absolutely exploding of late and is now nearing 300%.  On March 28th, this news came out:

'Cytokinetics announces opening to enrollment of COSMIC-HF expansion' via  Today... I dunno... In any case, there's clearly a huge event approaching for the firm and the option market reflects it in the volatility, in particular in May.

But here's the weird part... The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Normally biotechs (and event stocks n general) show parabolic skew: a reflection of both upside and downside tail risk.  For some reason, CYTK shows reverse parabolic skew.  Literally the opposite of what's expected.  Both the downside puts and the upside calls show lower risk (volatility) than the at-the-money (ATM) options.

So... a 'huge' event is coming, but the tail risk is muted relative to the ATM.. huh?...

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

Check out the vols across the top in green.  May is priced to 292.51%, Aug to 181.37%.  So, the option market reads: "Event in May!"

Now the real question:  Are the out of the money options too cheap?  Or, are the ATM options too expensive?

This one goes on the watchlist with vol alerts.  A good one to watch.

This is trade analysis, not a recommendation.

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