Wednesday, May 28, 2014

* Celldex (CLDX) - Tail-risk Elevated in Short-term; Is CLDX Ready to Move?

CLDX is trading $14.40, down 3.3% with IV30™ up 3.8%. The Symbol Summary is included below.

Provided by Livevol

Celldex Therapeutics, Inc. (Celldex), is a biopharmaceutical company focused on the development and commercialization of several immunotherapy technologies for the treatment of cancer and other difficult-to-treat diseases.

This is an interesting volatility note, but focused on the skew, rather than the overall vol level.

Conclusion: The option market reflects greater upside risk in the immediate-term than the inter-mediate term and this risk divergence has created several spread opportunities to analyze. In addition, note the call buying in the Jun 20 calls: 2,576 have traded on 82 open interest, so these are essentially entirely opening bets on a near-term explosion in CLDX stock.

I also note that CLDX is a member of the Gottlieb Biotech Index -- an index of small and micro cal bio-techs that allows us to track the entire group with one number.  You can read about that here:
Ophir Gottlieb Small Cap Biotech Index

Daily updates to the index are posted to the blog (see the recent posts to the right (in red).

The stock charts (all-time) is included below.

Provided by Charles Schwab optionsXpress

CLDX has definitely participated in the Bio-MOMO rally, going from ~$2 in late 2011 to as high as $38.84 in October of 2013.  The truth is, for all of these baby-biotechs, up is good news for society if they are finding cures for disease, so the the higher the better (if it's warranted).

CLDX has also been a part of the biotech meltdown, dropping from its peak to now $14.40, or a 63% drop in about eight months.

But this is about implied volatility (the risk in the equity price as reflected by the option market). Let's turn to the IV30™ chart (two-years) in isolation, below.

Provided by Livevol

We can see that explosion in the implied which corresponds with the earnings right after the stock hit its peak.  At the time, the price was ~$26.

As of right now, the IV30™ (30-day forward looking risk in the stock price) is in the 33rd percentile, so "lowish" relative to the last 52 weeks.  That number is a bit understated b/c of "how high the high" was.  In any case, CLDX overall risk as reflected by the option market is right about "normal"

But... the story turns when we look at the skew.  The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

We can see that Jun volatility (forward looking risk in the equity price through Jun 20th) is higher across all strike prices than Jul.  But, there's an even more noteworthy phenomenon, when we look to the upside strike prices, that divergence in risk grows.

In English, CLDX risk as reflected by the option market is much higher to the upside in the short-term than the intermediate term. So... is CLDX due for a move up, or is this much ado?

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

I have highlighted the vols in the out-of-the-money (OTM) puts and calls.  See how the Jul option volatility is lower than the Jun. Tail risk is higher in the short-term than long-term per the options.

As of right now the option market reflects a price range of [$11.50, $16.50] for CLDX by the end of trading on Jun 20th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
Order Flow
Note the call buying in the Jun 20 calls: 2,576 have traded on 82 open interest, so these are essentially entirely opening bets on a near-term explosion in CLDX stock.

This is trade analysis, not a recommendation.

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