Monday, August 18, 2014

* Tekmira (TKMR) - Ebola, Hepatitis B... Option Market: No Idea What Stock is Worth

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TKMR is trading $20.29, up 12.2% with IV30™ down 3.7%. The Symbol Summary is included below.

Provided by Livevol

This is a stock and volatility note on a 'story' stock... The story was Ebola and now it's also hepatitis B (details in body of article) in a stock that has traded at $5 and above $30 in just the last year.

I wrote a note on TKMR on 8-8-2014. You can read that post here:
Tekmira Pharma (TKMR) - What's Really Going On in this Ebola Epidemic and This Stock

The current stock price is a guess at the valuation and the option reflects just how little confidence there is in stability at these levels (not that it should be higher or lower, but that it might be either by a lot).

We have no idea how much this stock is worth in the intermediate-term.

The two-year stock chart is included below.

Provided by Charles Schwab optionsXpress

What's Going On - Ebola
Stock Rises 300% in three-months (details in body of article)
* Stock Drops 70% in next three-months (details in body of article)
Stock Rises 130% in last five weeks (details right now...)

First, the Ebola epidemic.

The outbreak of the Ebola virus in West Africa is an "extraordinary event" and a public health risk to other countries, the World Health Organisation (WHO) has warned.

All of the countries where there has been a breakout of the disease – currently: Guinea, Liberia, Sierra Leone, and Nigeria – should declare a national emergency, WHO recommended. This is already the longest and most deadly outbreak of Ebola recorded, since the virus was first identified in 1976.

Source: CNBC via Yahoo! Finance Ebola outbreak now international emergency: WHO, written by Catherine Boyle

And now, why TKMR is ripping (just headlines as links, they tell the story):
  1. FDA allows limited use of Ebola drug. Stock spikes
  2. Ebola Drug Firm Shares Go Bonkers After FDA Announcement
  3. Tekmira Ebola drug gets regulator change for possible human use
  4. Why Tekmira Pharmaceuticals (TKMR) Stock Is Spiking Today

The story in yellow was published today and does not surround Ebola:
NEW YORK (TheStreet) -- Tekmira Pharmaceuticals (TKMR) shares are up 12.2% to $20.30 on heavy trading on Monday after analysts at Leerink initiated coverage with an "outperform" rating and $25 price target.

Analysts at the firm believe that the company is "uniquely positioned" for growth due to the potential of its hepatitis B drug treatment to be a growth catalyst.

Source: via Yahoo! Finance Why Tekmira Pharmaceuticals (TKMR) Stock Is Spiking Today, written by Tony Owusu.

So now we have incredible uncertainty surrounding two drugs, an epidemic and basic confusion.

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).

In English, the red curve is the risk in future stock price movement. We can see the 'risk' peaked into the Ebola epidemic and has dropped since.  Still, the uncertainty is huge...

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

Provided by Livevol

I have included only the Sep monthly options and we see a parabolic skew shape, which is not 'normal' but for a biotech in flux is in fact expected.

The skew shows us that the tail risk (to either side) is elevated.  In this case, it's extremely elevated.

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

The options prices reflect that risk we have been discussing rather explicitly.  Here's how:

Using the at-the-money (ATM) straddle in December we can see that the option market reflects a price range of [$10, $30] by the end of trading on Dec. 19th.

That's a 50% wide band to the current stock price.

So... one standard deviation move would make this either a $10 stock or a $30 stock.  It's at $20 right now. But get this fact:  The 52 wk low for the stock is $5.08 and the 52 wk high is $31.48. So... the option market may be right on the money, or in other words, we have no idea how much this stock is worth in the intermediate-term.

  • 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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