Great expectations

  • LLY dropped Monday after mixed trial results for its Alzheimer’s drug
  • Move broke shares out of five-week trading range
  • Call volume outpaced put volume despite stock sell-off

Experienced traders understand that in the markets, there’s often a difference between information and expectations about that information. For example, even when a piece of data appears to be “good”—say, a lower unemployment rate—the market can still react negatively if the Street was expecting an even bigger decrease.

Traders may be gauging whether or not pharma giant Eli Lilly (LLY) is experiencing something along these lines after the company released the latest test results for its experimental Alzheimer’s treatment, donanemab. While the drug showed modest success in slowing cognitive decline (the Alzheimer’s Association described the results as “encouraging”),1 the market seems to have expected more of a breakthrough, at least judging by the stock’s sharp sell-off yesterday:

Chart 1: Eli Lilly (LLY), 12/18/20–3/15/21. Eli Lilly (LLY) price chart. Range breakdown.

Source: Power E*TRADE

Yesterday’s 10% intraday drop broke the stock out of the five-week trading range it began forming not too long after it released earnings on January 29, and brought it a little closer to the huge up gap that accompanied the initial donanemab Phase 2 trial results. But in addition to the expectation gap, there can also be a difference between immediate and longer-term market reactions to specific news catalysts—call it a period of digestion.

Most people wouldn’t have been surprised to find that LLY’s options volume was higher than average yesterday, but they may not have expected call volume to be much higher than put volume, since all else being equal, calls tend to be vehicles for playing the long side of a market. But by the early afternoon LLY’s call volume was nearly six times average:

Chart 2: LiveAction scan: Unusual call volume, 3/15/21. Call volume nearly 6x avg.

Source: Power E*TRADE

Another potential surprise: While sharp sell-offs often trigger spikes in options volatility (and inflate options prices in the process), LLY’s implied volatility (IV) was below average for all expirations through May:

Chart 3: Eli Lilly (LLY) options volatility profile, 3/15/21. Below-average IV.

Source: Power E*TRADE

In other words, LLY bulls who were interested in buying call options may have been pleasantly surprised to find they weren’t fighting too much of an uphill battle against high IV.

Although there appeared to be a great deal of anticipation surrounding the latest donanemab results, the story is far from over, and LLY isn’t just about one drug. The company handily topped earnings and revenue estimates (and provided in-line forward guidance) last month,2 and even after yesterday’s pullback, shares were up around 45% since October 30.

The lesson: There’s often a disconnect between expectations and reality in the markets—and also between initial impressions and the longer-term processing of information.

Today’s numbers (all times ET): Retail Sales (8:30 a.m.), Import and Export Prices (8:30 a.m.), Industrial Production (9:15 a.m.), Capacity Utilization (9:15 a.m.), NAHB Housing Market Index (10 a.m.) , Business Inventories (10 a.m.) .

Today’s earnings include: FuelCell Energy (FCEL), Lennar (LEN), Coupa Software (COUP), CrowdStrike Holdings (CRWD), Guess (GES), Jabil (JBL), Smartsheet (SMAR).

Today’s IPOs include: Jowell Global (JWEL).


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1 The Wall Street Journal. Lilly Alzheimer’s Drug Shows Modest Benefit in Clinical Trial. 3/13/21.
2 Eli Lilly & Co. (LLY) Tops Q4 EPS by 39c, Revenues Beat; Offers FY21 EPS/Revenue Guidance. 1/29/21.

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