Volatility Trading Digest - High Implied Volatility
Volatility Trading Digest - High Implied Volatility
High Implied Volatility
Arena Pharmaceuticals, Inc. (ARNA)
On May 11, the stock was up 2.70 on news that a panel of experts for the FDA recommended the obesity drug Lorcaserin for approval. The FDA has assigned a PDUFA date of June 27, 2012.
While we are waiting to see if the bounce back accompanied by some rotation back into the cyclicals will continue here is one that is likely to move independently from the market.
Here is the option data.
The current Historical Volatility is 190.32 and 96.39 using the Parkinson's range method, with an Implied Volatility Index Mean of 150.05 up from 141.13 last week, but down from 341.01 last month before the panel of experts recommendation. The IV/HV ratio is .79 and 1.56 using the range method to calculate the HV. The put-call ratio is bullish at .46 and has been under .30 for the last month. Friday's options volume was 30,724 contracts traded compared to the 5-day average volume of 20,410 contracts.
Since the implied volatility is likely to continue rising going into the announcement date scheduled for June 27, here is long strangle to consider.
If the implied volatility continues to rise as expected both the call and put should rise in value regardless of any price change. Although the FDA announcement date is subject to delay, we plan to close this trade on June 26 unless there is a new date announced.
All of the suggestions above use the closing middle price between the bid and ask on Friday. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
The weekend news from Spain will most certainly extend the bounce that began in the middle of last week. However, it could just be another opportunity to sell, so watch for further market breadth strength and cyclical rotation indicators among others for further signs of sustainability.
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