Monday, June 9, 2014

* Achillion Pharma (ACHN) - Stock Explodes; Volatility Explodes on News of a Takeover... for Another Firm. Awesome Option Market Reaction.

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ACHN is trading $4.43, up 53.8% with IV30™ up 70.7%. The Symbol Summary is included below.

Provided by Livevol

Conclusion (6-9-2014)
It appears ACHN stock will move soon, and it could be abrupt.  This $4.50 price is not equilibrium per the option market.

UPDATE 6-10-2014 (close)

Provided by Livevol

The stock has risen another 83.3% and the IV30™ is up another 16.6%. As I said in the conclusion yesterday: "It appears ACHN stock will move soon, and it could be abrupt." In two days the stock is up 170% and the move today was larger in $ and % than the move the day prior.

The news today (6-10-2014):
"Achillion is rallying for a second straight day after Merck announced that it had acquired Idenix (IDIX). Like Achillion, Idenix is a smaller company that has developed HCV treatments and, also like Idenix, one of Achillion's HCV treatments is a nucleotide. Achillion earlier today announced that the FDA had removed its clinical hold on sovaprevir. As a result of the FDA's decision, Achillion will be able to conduct clinical trials of the drug, the company stated."

Source: via Yahoo! Finance Stock Market & Financial Investment News

Back to 6-9-2014
This is a stock and volatility mote. ACHN stock is ripping on news, but not news about the firm. Check this out:

NEW YORK (TheStreet) -- Achillion Pharmaceuticals surged Monday amid news that Merck would purchase biotechnology company Idenix Pharmaceuticals for $3.85 billion as it tries to strengthen its position in the increasingly competitive hepatitis C sector.

Achillion could be the next acquisition target for larger companies. CNBC reported Johnson & Johnson and Abbvie were both interested in buying Idenix but Merck secured the purchase. Those companies, among others, could now turn their focus to Achillion, which has a pipeline of hepatitis C drugs.

Source: via Yahoo! Finance Why Achillion Pharmaceuticals (ACHN) Stock Is Up Today, written by Andrew Meola,

So, let's start with the stock chart, included below going all the way back to 2009.

Provided by Charls Schwab optionsXpress

This is a small bio-tech, so yeah, it moves a lot and often times the "a lot" is on a single day.  This was a $12.5 stock, and a $1 stock, has seen a 60% drop in a day earlier in the last 12-months and today sees a 60% pop on news indirect to the firm. Small cap bio-tech par for the course.

Not only is there some wild speculation in the stock, and yes, it is wild, but there is a fascinating set of phenomena occurring in the implied volatility.

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

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days). Check out the level ACHN has reached today.  It's not just a new two-year high, it's a "high" two-year high,

So what?  The equity market may be pricing in huge upside due to the MRK deal, but the option market is pricing something else huge: RISK.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Check out the volatility (risk) divergence between the Jun monthly options and the Jul options,  Jun is priced to much higher risk, or in English, the option market reflects massive potential volatility in the stock in the next few weeks.

I also note a volatility divergence to the upside.  The option market reads that a big up move (tail risk) is substantially more likely in the near-term (through Jun 20th) than after that date.

Again, in English, if the option market was an analyst, it would be saying something like:

"We see the potential abrupt upside risk in ACHN as highly elevated in the next two weeks and then falling if an event is not announced in that near-term."

This skew shape is not "normal" (nor should it be). 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

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$3, $5] by the end pf 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.

This is trade analysis, not a recommendation.

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  1. Going back to 0. This stock is pumped and ready for dumping!!

  2. Pumped, and ready for dumping!!!