**Please note that the following Hot Topic is based on Wednesday, October 20, pricing and session activity. We are trying to show readers how we examine historical and implied volatilities, technicals and fundamentals in the biotech space to derive a trade idea. The OptionsProfits Team.Pit trading was the ultimate lazy man's game. You stood there and the business came to you. You could blow out, sure, but ideas came to you courtesy of the market players that sent in streams of orders on a daily basis. My back of the envelope calculation is that I traded around 5-6 million contracts over my 15 years that came right to me. I let the good folks in marketing at the CBOE and PCX do all the work. Now you actually have to think about things to do. By and large the game is more about "market taking" instead of "market making. To do this you need to generate ideas.
This brings me to my Aqumin AlphaVision landscape of the day and the genesis of an idea. I use a combination of option volatility, technical analysis (the numbers, not so much the charts) and fundamentals to craft ideas. I generally start with a combination of technicals (volume, price, etc) first. In this case, I set up a landscape (yet to name this one) of five-day average volume, 100-day average volume and one-week total return to see what jumped out on my modified real time scatterplot (at Aqumin we call this a "grid"). For the most part, in the chart below, you see a diagonal line of green buildings. This just means the stocks are up for the last week and the five-day and 100-day average volume is roughly the same (this view is healthcare GICS Sector only).
The two highlighted spikes, Siga Technologies (SIGA - Get Report) and AGA Medical Holding (AGAM, stand out as having the five-day spike way above the 100-day average volume as clearly an outlier. AGAM is going through a buyout so nothing there. SIGA is a bit different. It just got picked by the Feds for a contract to provide 1.7 million doses of "Human BioArmor" (love that name). Up goes the stock to $14.00. There are two things that make this trade interesting. First, the contract is being challenged (by Chimerix) because it alleges that SIGA is not really a company that qualifies under the SBA (SIGA has around 50 employees). I figure the biotech funds that follow this stuff religiously would have been selling this hard if there was a real chance they do not get the contract, but it is possible. Secondly, if you look at the call IV (implied volatility) there is some considerable skew in the upside calls. Generally, when one of these little Biotechs gets a product approved and sold, the big pharmas lick their chops for new a product and market (cheaper to buy then build). I see this being priced in the options now via the upside skew (similar to how commodity options are priced).Normal HV (historical volatility) and IV (implied volatility) analysis goes out the window because SIGA has gone from concept to reality.
The two factors I mentioned above are keeping the implied volatility from going to the $50's. I see SIGA cruising through November while this gets sorted out. To me (if you have been reading my posts) that means sell an out-of-the-money put. Also, risk here is Level III (the most for my picks, since we are making a sly bet on a binomial event). If you do not know what I mean by Level III, read my Risk Tutorial 101 from last week.
Trade: Sell 2 SIGA November 13 puts for $0.75 or better with SIGA trading at $14.00 bid or higher.
At the time of publication, Andrew Giovinazzi held no positions in the stocks or issues mentioned.
Andrew is the Executive Vice President of Business Development for Aqumin, where he participated in the design team to apply AlphaVision to the financial markets. For 15 years he was a member of the Pacific Exchange and the Chicago Board Options Exchange, where he actively made markets and traded in both equity and index options.
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