Stock-based options selection

  • AXSM jumped close to a two-year high on Monday
  • Many calls more than doubled in price
  • Shares up more than 75% in past five weeks

Axsome Therapeutics (AXSM) jumped more than 32% to $74.74 on Monday after announcing positive clinical trial results for its Alzheimer’s treatment:1

Chart 1: Axsome Therapeutics (AXSM), 8/4/22–11/29/22. Axsome Therapeutics (AXSM) price chart. Gapped higher on drug news.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

It was the highest the stock had been since January 2021, and even after giving back some of the move on Tuesday, AXSM was still up more than 75% from its late-October low of $40.04.

A 233% gain in the AXSM January $60 call options—which started the day out of the money and ended it more than $14 in the money—was typical of the day’s options volatility. Even calls that were still well out of the money after the stock’s surge made sizeable up moves, including the January $100 calls, which surged more than 430% intraday before closing up more than 200%:

Chart 2: AXSM January $100 call, 8/26/22–11/29/22. Axsome Therapeutics (AXSM) options price chart. Call premium surged.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)

What makes situations like this interesting is that they can reveal similarities between traders with dramatically different time frames and market outlooks.

First, consider a bullish investor who decided to go long on Monday (or Tuesday), and executed a buy–write trade—purchasing the stock while also selling (“writing”) out-of-the-money (OTM) call options. (By collecting premium from the short calls, the investor effectively lowers the purchase price of the shares.)

Next, think of an options trader who believed the stock was likely to pull back, at least temporarily, after such a large rally. This trader may also choose to sell OTM calls to collect premium. In both cases, the goal is to sell options that won’t be exercised, which means selecting a strike price the stock is unlikely to reach by expiration.

One way some traders approach this is to see how much a stock has moved after similar rallies. (In AXSM’s case this is a bit of a challenge, since the stock has been trading only since late 2015, and has made very few moves comparable to its recent move.) For example, on Monday, the January monthly options had 37 trading days remaining until expiration. After similar rallies in the past, AXSM’s average 37-day return was 1.2%, although in a quarter of the cases the stock gained 33.6% or more.2

As a result, a conservative trader or buy-write investor who wanted to sell options with relatively low odds of being exercised (at expiration) may have focused on calls with strike prices at least 33.6% above the current stock price—which, using Monday’s closing price as a reference, would have been $100 or higher.

Market Mover Update: On Monday, January WTI crude oil futures (CLF3) rallied to close up on the day after breaking below their September lows and trading to their lowest level ($73.60) since mid-January (see “Oil pivot”).

Today’s numbers include: Mortgage applications (7 a.m.), ADP Employment Report (8:15 a.m.), GDP (8:30 a.m.), Advance International Trade in Goods (8:30 a.m.), Advance Retail and Wholesale Inventories (8:30 a.m.), Chicago PMI (9:45 a.m.), Job Openings and Labor Turnover Survey (10 a.m.), Pending Home Sales (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Survey of Business Uncertainty (11 a.m.), Jerome Powell speaks at Brookings Institution (1:30 p.m.), Beige Book (2 p.m.).

Today’s earnings include: Five Below (FIVE), Box (BOX), PVH (PVH), Snowflake (SNOW), (CRM).


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1 What to know about the Alzheimer’s drug data coming out this week. 11/28/22.
2 Reflects Axsome Therapeutics (AXSM) daily prices, December 2015–November 2022. “Similar rallies” refers to a one-day gain of 15% or more capping a 24-day gain of 40% or more. Supporting document available upon request.

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