Volatility Butchered At Human Genome After Successful Drug Trial

HGSI - Human Genome Sciences, Inc. - There was a predictable investor response after results of late-stage clinical trials on Benlysta paved the way for the first new lupus treatment for a half decade. Shares in the company surged to a high of $26.21 but are now pulling back to show a 33.8% gain at $24.98. Options implied volatility slumped from 224% to 69% on relief at the positive outcome has left the appeal of the company intact. It’s rare to witness premiums rise by less than a stock given the leveraged nature of options, but today that’s pretty apparent in many strikes. Curiously the put premiums in the November strikes from 23 down to 5 have seen premiums collapse by 87% and upwards. On the call side premiums between the 20 and 23 strikes are higher and only by less than 10% at the latter, while at any point between 24 and upwards, once again implied volatility has caused options to crater. Investors choosing last week’s 20/25 call spread would appear to be the victors today.

EEM - iShares MSCI Emerging Markets Index ETF - A large-volume credit spread was initiated in the January 2010 contract today by an investor expecting limited upward movement in the price of the exchange-traded fund through expiration. Shares are currently trading 2% higher to $38.37. The trader appears to have sold 51,700 calls at the January 43 strike for a premium of 75 cents apiece, and simultaneously purchased the same number of calls at the higher January 47 strike for 17 pennies each. The net credit received on the trade amounts to 58 cents per contract. The investor retains the full credit, which amounts to a grand total of $2,998,600.00, as long as shares of the EEM remain below $43.00 through expiration day. The credit-spread seems like a good money-making strategy especially because shares of the fund have remained below $43.00 since August 1, 2008.

BEBE - Bebe Stores Inc. - It was six months ago that clothing and shoe retailer, Bebe traded up to its 52-week high at $9.50 but has largely wilted ever since. Today shares in the half-billion dollar company are up 2% at $6.40 and options activity is striking. An investor traded some 30,000 call options at the March 10 strike for 20 cents. The activity appears to be to the buy-side, but still this looks like an outrageous bet that shares will take off. Not only must shares surge 48% to match the 52-week high but they’d need to rally 59% to break even at expiration. The volume is impressive but considering the difficult retailing environment it doesn’t seem logical to explain this situation away as a possible takeover candidate nor that the next earnings report will be a humdinger. A large block of stock trading at the same time as the options activity went through could be a short sale.

SMH - Semiconductor HOLDRS Trust - Shares of the semiconductors exchange-traded fund rose 0.5% today to $24.30. Bullish option traders employed a couple of different strategies in the near-term November contract. Put-selling took place at the November 23 strike where approximately 38,000 puts sold for an average premium of 32 cents apiece. The existing open interest at that strike exceeds the day’s current volume. Thus, the put-selling could be the work of investors closing out long positions or may represent bullish short-selling by traders expecting shares to remain above $23.00 through expiration day. The next strategy observed was a bullish call spread. The spread involved the purchase of 8,500 calls at the November 26 strike for 11 cents apiece, marked against the sale of the same number of calls at the higher November 27 strike for just one penny per contract. The net cost of the transaction amounts to 10 cents each. Shares of the SMH must rally sharply by at least 7% within the next few weeks in order for the call-spreader to breakeven at $26.10. Maximum potential profits of 90 cents per contract require that shares of the underlying stock jump to $27.00.

VRTX - Vertex Pharmaceuticals, Inc. - Biotechnology firm, Vertex Pharmaceuticals, realized a 12.5% increase in shares to $37.73 as of 12:30 pm (EDT) on news its experimental hepatitis C therapy may be taken twice per day rather than the current standard of three times per day. Fresh call positions were taken by investors some 5,100 times at the out-of-the-money December 40 strike. It appears 1,800 calls were sold for approximately 1.32 each. Perhaps call-sellers are long the stock and simply adding to portfolio income by selling covered calls. Nearly 3,000 of the call options at that strike traded to the middle of the market for 1.30 apiece. These contracts may have been purchased by investors looking for continued upward momentum through expiration next month.

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