Thursday, January 7, 2010

Mankind (MNKD) - Super Vol

MNKD is an $844 million bio-pharma trading ~8.28 (unched on the day thus far). The LIVEVOL™ Pro Summary is included below.

The Charts Tab snapshot below (click the image to enlarge) illustrates a couple of things.

(1) You can see the divergence between the IV30™ (red line) and the HV10™ (white line). That is, the stock hasn't moved much close-to-close recently, but the expectation is for a large move. The spread as of right now is 184 - 79 = 105 vol points. You can see all of the relevant HV and IV measures below (click to enlarge).

(2) The stock has traded with IV30™ above HV10™ before and in fact the implied vol under stated the actual stock move. i.e. that vol was a purchase rather than a sale though the divergence seemed to indicate the opposite. This is very common with bio-pharmas as the stock stays put until FDA or trail data is released and then the stock moves abruptly. For MNKD, the stock dropped significantly in Oct.

The relevant news is below (provided by news service):
MannKind volatility elevated into PDUFA
MannKind closed at $8.28. MNKD is in discussions with FDA over Afresa product label reports Reuters. PDUFA date for AFRESA with the dreamboat inhaler is expected near January 16. ...

What's so intersting about that? As luck would have it, Jan 15 is the the third Friday of January - aka options expiration.

The Options Tab snapshot below (click to enlarge) demonstrates the Jan option markets.

I have highlighted the OTM options. Note the 12.5 calls are 0.10 bid on a 8.26 stock with one week to go to expo. The stock would have to move 51% in 6 trading days (excluding today) to get to 12.50. That's 329% annualized (based on 250 trading days). Similarly you can see bids in the OTM puts.

NOTE: I AM NOT SAYING THESE ARE SALES. This is just an observation and an illustration of vol in bio-pharma. Selling 0.10 options is generally a terrible idea.

A risky bet would be to sell some vol in Jan (probably not the baby options though) and buy the vol in Feb. If the PDUFA comes out after expo then you get to collect the high vol in Jan and have it pay for the vol in Feb which would hopefully be too cheap as it was before.

NOTE AGAIN: This isn't trading advice, it's just illustrative.

Of course, some scary stuff could happen. For example, if the data comes out after market close then you can't hedge what could be a dangerous short gamma position. Recall that on the day of expo, options are pure gamma - they're essentially not vol bets anymore. Also, short options leave the exercise decision to the option holder.

You could come in Monday with collapsed vol in Feb (paid too much) and having sold too cheap vol in Jan.

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