Medivation, if you've been under a rock this morning, announced bad results for an Alzheimer's drug (which Pfizer was involved with as well) and was destroyed this morning to the tune of 70%:
But it was Livevol's time & sales report that caught my attention. Specifically:
This sure smells bad. But that it was a spread does not necessarily mean that the trade was taken on inside information. Indeed, it might mean the opposite.
Consider that if both positions were sold then the trader got $14 + $17.50 = $31.50 per contract, assuming a 1x1. It actually looks like, however, a 1x2 (2x PUTs) with about 8,000 calls and twice as many PUTs.
So how does the trader win or lose?
Let's plot it out, assuming these contracts were sold:
This actually looks like a fairly reasonable trade going into a binary event like this. It loses under $13 or over $79, roughly, and makes the maximum profit at $40, with a couple of weeks to go. Yes, it has the potential to make $30 million smackers, which sure isn't shabby!
As of right now, with the stock trading $13.21 (as I wrote this), the trade is profitable - barely.
Insider trading or smart trading? Heh, that's a pretty good range! Even if the drug had hit, would it really have spiked up over $78 - and on a miss under $13?
Well, the trader probably thought not. So far he's right.
But a quick analysis of this trade doesn't appear to show a clear directional bias, which would have, given the money involved, been pretty clear evidence of inside information. Indeed, the "centroid" of the spread was right near the closing price yesterday.
This looks like a probability trade to me, which is exactly what you want to do when there's a news event and you think the options are rich at their implied volatility given what you think is going to happen. Indeed, I remember the Dendreon (DNDN) AC decision a couple of years ago during which I was doing spread trades like a madman, and made some nice coin doing it. I no more knew anything about the outcome of the AC than did the man in the moon but I saw an opportunity with a complex option spread and put it on. As the trade I put on had a defined risk I figured out how much I was willing to lose and stuffed size on as the decision approached - it sure looked big, but the net exposure, when it was all said and done, was reasonable.
I'm the first one to jump on an insider-trading scam if I see one, but this time, without more information to make me suspicious, I don't.
Disclosure: No, that trade wasn't mine - no position.
Disclosure #2: Nice analysis software eh? ThinkOrSwim folks. Really. And no, they don't pay me to say that :)
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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