DNDN - The Full Story Option & Market Implications

DNDN is trading 40.81 with IV30™ up 4 points to 143. The LIVEVOL™ Pro Summary is below.



I normally finish with the chart - but it's a better place to start for this company.
The Charts Tab is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



Note how the stock has gone straight up as IV30™ has also risen. This is opposite to the "normal" pattern which says vol goes down as stocks rise. Of course, the normal situation is not a bio-tech.

What's Going On?
An FDA decision is due out on Provenge - their prostate cancer drug. Start with the fantastical stock chart for the last 3 years below (click to enlarge).



This is a rough road map of events - if you're looking for absolutes, check out the news please...

The first rip up occurred when an FDA committee agreed with the results of the then tiny bio-tech that their drug did three things:
1) Extended life
2) Was safer (much safer) than chemotherapy
3) Reduced tumor sizes

Then the stock drops size: A litte after that the FDA rejected approval but said they agree with 1 and 2 emphatically - but since the endpoint (goal) of the paper DNDN published was focused around tumor size shrinkage - they could not approve it b/c they weren't convinced of this one piece.

Then the stock ripped back up - DNDN did even more research that was even more convincing of the drugs efficacy in 1 and 2 and that it also shrunk the tumors. The FDA committee agreed again. I'm not sure if DNDN has taken out the tumor shrinking claim to gain approval or if their newer data was just overwhelmingly evident of this phenomenon - either way - the drug looks like it will get approved with or without the final point.

With it looking to everyone that the drug would be approved, DNDN did some major share offerings to finance a build out of labs and manufacturing capability claiming the demand would be overwhelming relative to their capacity - so the stock kind of bumbled around.

Since then DNDN has continued to publish data in support of the drug pushing the stock higher - sort of evidence that all this build out is going to be necessary since the drug really works.

And now... The FDA is supposed to decide/rule on the drug within the next week.

What Does the Option Market Think?
Let's look at the skew chart (click to enlarge)



Normally with a bio-tech on the hook for an FDA decision the skew is parabolic - sort of even bets that it goes up a lot or down a lot. The wings are generally very expensive as the possibility for huge moves are priced in. To read in general why option skew exists CLICK HERE.

However, for DNDN, you can see what almost looks like a "normal" skew. The upside potential is muted (upside is cheap relative to downside - relative I said - it's far from cheap). The downside is extraordinarily expensive. Let's take a look at the Options Tab (click to enlarge).





Just one example are the May 25 puts - IV is 222 - they have fair value ~$2. Those break even with the stock at $23 or an $18 move down.

What Does This Imply?
The skew demonstrates that the risk now for DNDN is to the down side. Why? - Possibly b/c the approval is priced in at this point as the stock has wandered up to $42 from $25. Whatever the case, vol will implode after the decision as long as it's definitive. Even if it's not definitive, May will definitely crash.

If you think the drug will be approved and move a little, or you think the drug will not get approved - selling the upside calls could be a play. The May 50 calls are worth ~ $2. But, the May 75 calls are $0.20 bid - yikes! If the stock goes there - selling the 50's is trading suicide.

The super OTM calls are bid in case the stock rips on the news or, and also possible, the stock announces a takeover...

On the downside there a bunch of put spreads that look pretty juicy depending on where you think the stock will go.

The general (and often wrong) rule for bio-techs is to sell the wings and buy the meat. Whatever you do, being naked options is a HUGE risk. Spreads, spreads, spreads...

What spread to do?
You can sell the strike where you think the stock is going to land, and buy the strikes where the you think the stock is going away from.

This is trade analysis, not a recommendation.

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iStar (SFI) - Call Accumulators Growing

SFI is trading 6.10 up more than 135% from it's close 12-31-2009 with earnings coming up 4-29-2010 (BMO). The LIVEVOL™ Pro Summary is below.



The company has traded nearly 40,000 options today on total daily average option volume of just 1,915. All but 96 contracts have been calls for 403:1 call:put ratio. The largest volume have been Jun 7.5, Jul 7.5, Jul 5 and Jun 5 calls respectively. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates the volume relative to OI. Other than the Jul 7.5 calls, everything else has traded at or below OI. The Jul 7.5 calls are opening purchases. A little bit of digging reveals that the other three calls are long open interest and the trades today have been pre-dominantly purchases - so these are new opening order long positions (according to my research - you might want to double check).



The Skew Tab snap is nice - it shows the 10 level calls bending up even though the action has beenin the 5's and 7.5's. I've highlighted both the 7.5 and 10 level strikes (click to enlarge).



Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



We can see the stock was in the mid $2 range and is now over $6 just a few months later. Earnings are 4-29-2010 BMO.

This is trade analysis, not a recommendation.

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Northrop (NOC) - Bullish Positions Grow into Earnings

NOC is trading 68.94 with earnings coming up 4-28-2010 BMO. The LIVEVOL™ Pro Summary is below.



The company has traded nearly 14,500 options in the first two hours on total daily average option volume of just 1,228. All but 230 contracts have been calls. The largest trades have been the Nov 70 and 80 calls. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates that the calls are mostly opening (volume > OI) and a further investigation shows that this OI will be larger than almost any other line (other than Jan '11 70 calls which are also long OI).

The trades are listed as a spread - but I don't see that at all. I see that as a purchase of the Nov 70 calls for $3.80 against a $3.60-$380 market. AND, I see the Nov 80 calls traded $0.80 against a $0.70 - $0.85 market. That doesn't look like a spread, it looks like purchase/purchase or more commonly known on the floor as a call stupid. Combine that with the 8,000+ long OI in Jan '11 70 calls and that's some bullish OI.

Note that today the stock is not real active - ~500k shares have traded against average daily volume of ~ 2 million. I note this b/c it does not look like these calls are trading with a stock hedge.



The Skew Tab snap is interesting - the Nov calls aren't bending upward but the Jun 80 calls are. I've highlighted the 80 strike (click to enlarge).



Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



You can see the stock has basically been going straight up.

This is trade analysis, not a recommendation.

Disclaimer: I'm long a little NOC stock so I am rooting for this thing to go up. Don't mistake that as advice - I'm just like everyone else, I want longs to go up and shorts to go down. I don't recommend anything.

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Royal Caribbean (RCL) - Put Spreader into Earnings

RCL is trading 37.18 with IV30™ on the rise into earnings Wednesday (4-28-2010 BMO). The LIVEVOL™ Pro Summary is below.



The company has traded over 43,000 options in the first hour on total daily average option volume of just 9,476. All but 330 contracts have been puts. The largest trade has been a Jun 25/33 put spread purchase (buy 33 puts) 20,000 times paying $0.95. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates that the 33 puts are opening and the 25 puts are trading the same size as OI. I checked - the 25 puts were long interest so the sales today are a close.



The Skew Tab snap (click to enlarge) illustrates where on the skew curve the spread was done.




Finally, the Charts Tab (12 months) is below (click to enlarge) for just the stock price (vol charty omitted)



You can see the recent climb in RCL. My best guess would have been that this is a long shareholder hedging - this covers 2,000,000 shares to the downside. But - I only see a single shareholder with 1.4 million shares, and no one else all the way down to 316,000 shares.

20,000 spreads for $0.95 is a $1,900,000 purchase.

This is trade analysis, not a recommendation.

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USG - Big Bull Bets on Vol Rise After Earnings

USG is trading 23.94 with IV30™ up 15.6%. The LIVEVOL™ Pro Summary is below.



The company has traded over 36,800 options today on total daily average option volume of just 1,988. The largest trade was a call spread purchase in Jun. Calls alone have traded more 15x average total volume on a 5:1 ratio with puts. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates that the active calls in May, Jun and Aug are mostly (or partially) opening as volume > OI. The May 25, Jun 25 and Aug 25 calls are predominantly purchases - the Jun 27.5 are sales to a spread. You can also see how vol is climbing size today. IV30™ went from 50 to 40 after earnings a few days ago - and now it's right back to 50.



The Skew Tab snap (click to enlarge) is interesting in that it's not... It just looks like a normal skew - no calls in any month seem out of line. To read why skew exists and what "normal" shape is you can click here.



If the order flow continues I imagine at some point the upside would bend. Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



You can see the steep run up in stock off earnings from ~$19 to now over $23 in just a week. I've also blown up the vol chart and hyper magnified on just a few days to illustrate the weird vol moves (click to enlarge). The rise into earnings and drop are normal - the re-rise is the odd part.



This is trade analysis, not a recommendation.

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Janus (JNS) - Large Opening Sep Bet Makes Sense

JNS is trading 14.18 having reported earnings yesterday BMO. The LIVEVOL™ Pro Summary is below.



After reporting earnings yesterday (4-22-2010, BMO) the stock finished down ~$1 and vol came down 7 points or 18%. The results were sort of blah (and that means something to a trader) - the headline is included:



The company has traded over 4,200 options in the first two hours today on total daily average option volume of just 254. Almost the entire volume is a single bet in Sep. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab and prices above (click to enlarge) illustrates the trade in Sep:
Sell Sep 12.5 puts @ $0.70
Sell Sep 17.5 calls @ $0.35
Buy Sep 10 puts for $0.30

You can look at this a few ways - it's easiest for me to think of as a short strangle with downside protection. Note the option volume is well above the OI on all three lines - this is an opening bet.

JNS had earnings yesterday, which means the next cyle should be mid-summer (a notoriously slow time for the market) and then after that in Oct. This bet only has to deal with one earnings cycle - and it's a summer cycle.

The Skew Tab snap is included (click to enlarge). You can see how much higher the Sep vol is relative to the other months b/c it has the earnings cucle.



This is an interesting bet. It makes money as long as JNS stays below $18.25 and above $11.75 with a limited downside. Max gain is anywhere in [12.5, 17.5] of $105,000 using 1,400 spreads and the prices above.

Finally, the Charts Tab (1 year) is included (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



The historical stock price movement finishes the story. If the past is relevant to the future - we can see JNS 52 wk. high is $16.06 (far from 1$8.25 or even $17.50) - but it has dipped below $10 (52 wk. low is $8.55).

So, sell the summer earnings vol (and hope for another "blah" report) which is elevated now, protect the down side based on the stock chart and get out before the potential Oct craziness - that's the bet, and it makes sense.

This is trade analysis, not a recommendation.

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Beazer Homes (BZH) - Long Position Building into Earnings with Vol

BZH is trading 6.23 with IV30™ up 15.4%. The LIVEVOL™ Pro Summary is below.



The company has traded over 14,500 options today on total daily average option volume of just 1,286. Calls are trading on a 3:1 ratio relative to puts. The largest trade was a sale of the Nov 5/7.5 risk reversal (buy calls/sell puts) @ $0.07. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).





The Options Tab (click to enlarge) illustrates a few things:
(1) The risk reversal was mostly opening for both the calls (long) and the puts (short). We see this b/c the open interest is significantly smaller than the trade volume.
(2) The Jun 5 and Jun 7.5 calls are less than OI - need to check if they're opening or closing
(3) The May vol is up 12.0 points while the back months are more muted.



The May 5 and 7.5 calls are predominantly purchases. The OI is long - so these are double downs (I checked using the level 2 pop-up and Time & Sales). These call purchases together with the risk reversal are very bullish if not done with stock. Having said that - I dunno if that's the case. Stock has traded over 2x normal volume already. Either way, people are getting long the juice - and vol is spiking with that order flow.

The Skew Tab snap is pretty interesting - you can see the upside skew super bent up for the two front months.



You might see either the Nov 7.5 calls come up, or the other months come down (or a mixture of both). The divergence could converge. Keep in mind, earnings are in this May cycle.

This is trade analysis, not a recommendation.

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Microsoft (MSFT) - Earnings Preview

MSFT is trading 31.18 with earnings AMC today. The LIVEVOL™ Pro Summary is below.



The company dipped after the open and vol increased but the trend quickly reversed with a small pop in stock price and a corresponding drop in front month vol that actually put it down on the day. The Tick Chart is included (click to enlarge). Stock on the top, vol on the bottom.



The Options Tab snap (click to enlarge) demonstrates a couple of things:
1) The front month ATM straddle is worth $1.64
2) The front monnth vol (24) is just three points above the second and third months (21).



The Skew Tab snap from today and from the day of earnings in the last cycle (1-28-2010) are included. Note the seven point divergence in front to second month vol in the last cycle relative to the somewhat muted vol diff this time.





MSFT followed a consistent earnings pattern for five consecutive cycles starting with the 7-17-2008 cycle and ending with the 10-23-2009 cycle. Specifically, a straddle sale at the close on the day of earnings and a purchase back the day after was a winner each time. The Earnings & Dividends Tab for those cycles is included with the relevant values highlighted (click to enlarge).



The next two earnings cycles were the opposite. A straddle purchase was a win for the one day holding period. The Earnings & Dividends Tab snap for those cycles is also included (click to enlarge).



Looking more carefully at the earnings cycles we can see a clear patten in vols. Namely, the vols have generally decreased over the last 8 quarters (like the rest of the market). The vol stats per earnings cycle are included (click to enlarge).



The vol average for the five cycles when a sale was a winner was 50. Excluding the 10-23-2008 cycle (when the world was exploding), the average is still 43. The average for the last two cycles was just 34. Today, it's 24.

Keep in mind that May has the longest options cycle possible as the 1st is a Saturday. That makes options worth more ceteris paribus.

This is trade analysis, not a recommendation.

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