Can biotech drug events work?

[jfouche 12]

In theory, scheduled events for biotechs such as an FDA approval panel ruling would seem to fit the same basic mold as the earnings strategy. It probably requires a little more risk-taking, but some of the spikes in IV can be pretty breathtaking. Has anyone tried to play in this area?

[Kim 7,503]

We can definitely look at it. If you have some FDA dates, future and past, please post them here, we can do some backtesting.

[Marco 221]

While in general its the same principle as with the earnings plays (and might very well work) the problem is they are less comparable. Even if a certain company has fairly regular dates where some drugs get or don't get FDA approval, drug A might have the potential to be a multi billion dollar blockbuster (Alzheimer or Diabetics drug) and drug B might be for a much smaller market. So you have to know a lot about the potential impact to the bottom line and its not as easy to compare as earnings so it will be harder to estimate whether a certain implied move is rich or cheap.

[jfouche 12]

Here are a few lists of dates to start. I checked some of the trades briefly with TOS, and it can work, although probably only half the companies have a viable options market with liquidity. Here are a couple of scenarios:

 

1. Stock is in the $3-$10 range, and the drug event is essentially the entire future of the company. In this case I doubt there is a viable straddle which can overcome transaction costs consistently, though IV does do huge moves. Basically the stock itself is a call option on a miracle drug.
2. A more mature company, usually at higher stock price, has one of many drugs come up for review. Here it might be able to work.
3. A mega-biotech or huge pharma with many products has an event. I saw no reaction in IV for those.

 

http://www.thestreet.com/story/11635300/1/27-drugs-facing-fda-approval-in-2012-2013.html

 

http://www.thestreet.com/story/11516792/1/26-drugs-facing-fda-approval-in-2012.html

[PaulCao 51]

Hi, 

 

I used to take on the other side of the trade, writing biotech companies straddles or calendar spreads before their catalyst event, 

 

There's a few caveats: 

• Catalyst events like FDA decisions are already priced-in. The straddles are very expensive as maketmakers generally expect a huge swing in price. I've seen IM in the range of 50-100% for ITM straddles. 
• Small-cap biotechs sometimes unexpectedly offer new shares which causes the stock to swing downward dramatically, making the straddle very profitable. 
• IV spikes very high as the stock goes into a FDA committee or PDUFA date (which is FDA's final decision after an public advisory committee convenes and decides on a decision). However, people pump up the stock on a general uptrend before catalyst; so rolling is very important. 
• Sometimes companies pre-announcement parts of their clinical trial documents, which causes IV to collapse before expected date or cause the stock to upswing so much that the straddle becomes more profitable. 
• Sometimes the company would announcement a significant strategic partnership or full-buy out by the BigPharma which causes the stock to go on a upswing. 
• Liquidity is sometimes a huge problem as these tickers are not big traded stocks and are very volatile. Spreads are sometimes .10-.20 for a symbol trading at $1-$5. 

I used to look up catalyst events and then underwrite options with high premium that would expire before the catalyst event, worked pretty well for me. If you are going to do the reverse, I'd buy the straddle way before a catalyst event because unlike earnings event, the IV is already spiked pretty high 2 weeks before a drug decision. 

 

The best resource I've found for FDA events is on biorunup.com; they have a FDA calendar with upcoming ticker symbols; also IB option scanner is a pretty good bet too, basically all of the highest-rated IV are biotechs facing FDA decisions, 

 

Best,

PC

[jfouche 12]

Great comments. From browsing TOS it does appear that the entry time would have to be significantly earlier. This may also be less of a risk because sometimes results come out early, and ideally you would be out of the straddle at that time. 

 

Writing the pre-event options would mean you are selling protection against an early outcome/setback, and also taking the negative gamma of anticipated run-up before the news. I like that too.

[jfouche 12]

As a live test, the BIIB Apr 165/185 strangle is trading around $7 with BIIB at $175 and their MS drug's approval expected no later than 3/28. Let's see if it can gain value from this point.

[jfouche 12]

As a live test, the BIIB Apr 165/185 strangle is trading around $7 with BIIB at $175 and their MS drug's approval expected no later than 3/28. Let's see if it can gain value from this point.

 

The announcement came on 3/27 after hours, but this strangle traded down to $5.50 or so in the days before the news. Post-announcement, the stock made a solid move, but there was no profit before the announcement unless you made an entry about 10 days later than my post [3/24 or 3/25]. If you entered then, you might have gotten $5.50 and been out at $6.30 to $6.60. 

 

[Obviously the stock ramped post-news and the straddle is now $14, but that is a different story].

[jfouche 12]

Other examples:

 

UTHR --  Again, ATM straddle at $60 was not profitable -- it stayed around $7 despite some volatile stock action. FDA announced rejection on 3/25, earlier than expected, at which point it collapsed under $3.

 

JNJ -- Straddle at $80 was profitable if you got in between 3/20 and 3/25 and sold 3/29, possibly as much as 50% [$1.8 to $2.4]. This one is probably gamma related. JNJ has lower IV than almost any other stock, so a $1 anticipatory move is wild action.

 

GILD -- This one is scheduled to get HIV drug news around 4/15. Currently the Apr 47.5/49 strangle trades $1.50. Stock has been very strong lately.

[jfouche 12]

I watched GILD closely. This one had a few days of vol spike with no stock movement, then had some unrelated announcements push it to almost $50. Definitely would have been a profitable straddle, though the strangle above is not hugely profitable.