Wednesday, December 12, 2012

Vertex Pharma (VRTX) - Depressed Vol in Gapping Stock

VRTX is trading $42.32, up 1.2% with IV30™ down 3.9%. The LIVEVOL® Pro Summary is below.


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Vertex Pharmaceuticals Incorporated (Vertex) is in the business of discovering, developing, manufacturing and commercializing small molecule drugs for the treatment of serious diseases.

But, this is a company with ~$9 billion market cap and revenue nearing $2b / yr. This isn't a baby bio-tech. Having said that, it's still a bio-tech and this is a vol note -- depressed vol in particular. I found VRTX using a real-time custom scan that hunts for depressed vols.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 20
IV30™ Percentile LTE 10
Average Option Volume GTE 1,200

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed to its own annual history (at most in the 10th percentile). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), and I want a minimum vol level so I don't pick up any boring ETF’s (or whatever). The stock price requirement helps me identify names that have enough strike prices to trade or spread.

The VRTX one-year Charts Tab is included (below). The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can a radical gap up on 5-7-2012, when the stock rose from $37.41 to $64.16 in two days. We can also see the steady decline after that move up until the last few trading days, where VRTX has made a nice turn up. On 12-7-2012 the stock closed at $38.88 and is now trading at $42.32, so a healthy pop over the last five calendar days. The 52 wk range in VRTX is [$28.49%, $66.10].

On the vol side we can see how the implied has been dipping. I've included the IV30™ one-year vol chart in isolation, below.

While there have been some rather impressive peaks, as of this writing we can see that the implied is sitting just above an annual low. The 52 wk range in IV30™ is [36.99%, 76.45%], putting the current level in the 2nd percentile (annual). It's this vol level that caught my eye.  Note that the HV180™ is 69.78%, or in English, the long-term historical realized vol of this sock is well above the short-term implied.

Finally, let's look to the Options Tab (below).

Across the top we can see the monthly vols are priced to 37.16%, 38.43% and 45.01% for Dec, Jan and Apr, respectively. The next earnings release should be in Feb -- so outside of the front two expiries and inside Apr. In any case, given the industry, overall systematic risk of the market and the low vol level relative to its own past -- I thought this was an interesting one to look at.

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This is trade analysis, not a recommendation.

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