Wednesday, September 10, 2014

* Alcobra (ADHD) - Nano Cap Biotech With a Risk Profile That is Literally... Incredible

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ADHD is trading $16.84, up 0.5% with IV30™ down 0.5%. The Symbol Summary is included below.

Provided by Livevol

Disclosure: I am short Sep puts in ADHD
Volatility Update: 9-16-2014

On the original post date (six days ago):
Sep Vol: 196%
Oct Vol: 321%

Oct vol rising is normal as we approach a potential event, but Sep vol rising is a surprise.  Is news coming out in the next four days?

Alcobra Ltd is a Biopharmaceutical company with 9 employees, zero revenue, a $230M market cap and an event coming up in the next month (ish) that could be make or break for the firm.

The risk pricing in this stock is so bizarre I can't even come up with a headline.  I will show you some phenomena that will bend your mind if for no other reason than an effort to understand what the hell is going on.

Take all of this together and this is one of the most intense, bizarre and interesting risk events in a very long time.

Alcobra Ltd. to Present at the Aegis Healthcare & Technology Conference

Alcobra Announces Enrollment of First Patient in Phase IIb Clinical Trial of MDX in Adolescents With ADHD

Alcobra Starts Patient Enrollment for Mid-Stage Study on MDX

Alcobra Announces Enrollment of First Patient in Phase IIb Clinical Trial of MDX in Fragile X Syndrome

Alcobra Releases New Neuroimaging Data Supporting Pro-Cognitive Effects of MDX

Summary of News
Alcobra Ltd. is an emerging pharmaceutical company primarily focused on the development and commercialization of a proprietary drug candidate, MDX (Metadoxine Extended Release (MG01CI)), to treat cognitive disorders including Attention Deficit Hyperactivity Disorder (ADHD) and Fragile X Syndrome. MDX has completed multiple Phase II studies in adults with ADHD and has completed enrollment in a Phase III study in adults with ADHD. The company is conducting separate Phase IIb trials in pediatric ADHD and Fragile X Syndrome.

August 20th 
Alcobra Starts Patient Enrollment for Mid-Stage Study on MDX

The multi-center, randomized, placebo-controlled study will evaluate MDX for 6 weeks in adolescents and adults suffering from fragile X syndrome in comparison to placebo. Alcobra intends to complete the study and report top-line results from the same in the fourth quarter of this year.  

The company stated in its press release that there are no approved products in the market for the treatment of fragile X syndrome. As a result, the approval of MDX will open up an untouched market for Alcobra.

We note that MDX is being developed for other indications as well. Alcobra is currently evaluating MDX in a phase III study for the treatment of adults suffering from attention deficit hyperactivity disorder. The company completed patient enrolment for the study last month.

So in English, they are far along in the arduous drug development process... Oh, and by the way they are presenting on Thursday Sep. 11th at the Aegis Healthcare & Technology Conference... and they have an event coming soon that could change everything... and they may be entering a slice of a market with no other competitors.

Let's start with the stock price chart.

Provided by Charles Yahoo! Finance

The firm has risen from the sub $5 range, crossed above $25, come back down to ~$14 and is now sitting at ~ $17.  Easy for me to say, but none of that matters because the firm will be releasing trial results in Q4 of this year.

Risk Pricing
it's all about the event and the pricing of that event.  let's turn to the IV60™ 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 (IV60™ looks forward exactly 60 calendar days).

In English, the yellow curve is the risk in future stock price movement.  That risk in the IV60 is a reflection of an upcoming event, rather explicitly by the option market.  This phenomenon is not unusual, in fact it's expected and repeated for every pubic biotech company on the planet with an upcoming event.

But... here's where it gets crazy.

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

Provided by Livevol

The red curve represents the September options.  The shape of the skew bends up, which means the out-of-the-money (OTM) calls are priced to higher risk than the at-the-money (ATM) options and they OTM puts.  English: The risk reflected by the option market in the stock price for Sep is decidedly upside biased ("higher likelihood of an upside tail move than a downside tail move). Ok...

That red curve could very possibly reflect the risk of some unanticipated announcement tomorrow at the conference.

But then we look at the yellow curve (the October options).  That skew shape is decidedly downward sloping.  That means the option market reflects equity risk the exact opposite of September.  What?...

Notice (also) that the yellow curve lies well above the red curve for the ATM strike price, which means the option market reflects much greater risk in Oct than Sep. So, yes, the option market reflects an announcement on this trial in October not September.  We can actually see this explicitly in the option prices in a second.

So what do we have right now?

1. The event "results" should be out in October expiry and likely not Sep (so after Sep 20th).
2. If there is news in Sep (before Sep 20th), the option market reflects "good news."
3. If the news is after Sep. 20th, the option market reflects a higher likelihood of bad news.
4. In either case, the risk (volatility) is extraordinarily high.

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 [$13.50, $21.50] by the end of trading on Sep. 19th.

Using Oct options, we can see a price range of [$4.50, $30.50].  Yeah... Look at that price range... That's crazy wide, but can certainly happen with baby (nano cap) biotechs.

Take all of this together and this is one of the most intense, bizarre and interesting risk events in a very long time.

  • 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. Could it also be, as I have been reading it anyway....that "smart money" knows that no data will be out before Sept expiry, so have been net sellers of options to "dumb money" to collect that rich premium (as some of us have, with buy-writes, spreads, OTM puts, etc. And then buying Oct options.

    One of the big trades has been a call spread buyer of Oct 7.5/22.5. They bot a bunch of them. How does that trade sound to you?

    1. i can't really comment on specific trades, nor can i give advice, but, if (IF) Sep is a non event, then funding Oct options with a sale of Sep options obviously would be a very attractive looking trade. Further spreading off Oct (after Sep expiry) with OTM options, brings the premium bet down and leaves substantial upside. BUT if Sep has a big move, that trade could get crushed, as that short gamma in Sep will be very painful.

  2. maggie.danhakl@healthline.comDecember 6, 2014 at 4:10 AM


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    Healthline • The Power of Intelligent Health
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