Tuesday, January 26, 2010

Salix Pharma (SLXP) - Vol and Skew Comps into FDA Decision with Strangles

SLXP is trading 28.74 with IV30™ up slightly. The LIVEVOL™ Pro Summary is below.

The company has traded over 10,500 options today in the first 2 hours on total daily average option volume of 1,133. The Company Tab snapshot is below (click the image to enlarge).

The bulk of the volume has been a 4,000 lot purchase of Mar 22.5/35 strangles (buy 35 calls, buy 22.5 puts) for 2.20. The day's biggest trades and Option Tab snapshots are inlcuded below (click either image to enlarge).

Note the trade sizes are significantly larger than the open interest - these are opening trades. Note also the Mar vol relative to Feb. The news is this:

From Briefing.com:
The firm [read: Wedbush] notes that with an advisory panel now on the schedule for February 23 and several channel checks confirming their thought that the FDA more wants to discuss Hepatic Encephalopathy, in general, as opposed to any specific issue or safety concerns with Xifaxan, they see as lower risk going into the meeting. Additionally, the firm thinks the feedback from the FDA on the content and format of the NDA package for IBS-D and a confirmed timeframe there of a submission targeted for the first half of 2010 is an incremental positive for the co.

So The vol event is in the March cycle as expo for Feb options is Feb. 19 (four days before the announcement).

The Skew Tab snapshot illustrates some interesting phenomenon. Click the image to enlarge it.

First, we can easily see the vol difference between the front month (red) and the other months (yellow is March). Second, and more interesting, you can see a relatively flat skew. This is somewhat unusual. The very generic thought process going into small pharma/bio tech decisions is that the ATM vol is a purchase and the OTM vol is a sale - obviously it's not that easy - that was not advice, just analysis.

In this case, the OTM vol (the edges of the graph) are pretty flat. For reference, I have included the BA (Boeing) skew chart. You can see how pronounced BA downside skew is going into earnings. Essentially, the skew shows that BA has greater downside risk relative to ATM vol than the small pharma with an FDA panel meeting coming up. Again, that's a RELATIVE comparison. Absolute vol is much lower in BA. Click the image to enlarge it.

The Charts Tab illustrates that SLXP can move substantially on news and when it does, the IV "would have been" a purchase. In the chart on the bottom half of the tab, the IV30™ is the red line, the HV30™ is the blue. Note how high the HV30™ got with that big move near September of last year relative to IV30™ now.

With the large strangle purchase, it looks like someone does feel that the OTM options are too cheap - and they showed it with a 4,000 x 100 x $2.20 = $880,000 bet.

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