Market news you can use

06/19/19
  • Implied volatility (IV) dropped sharply in GBT options this week
  • Biopharma company released important trial data last Friday
  • Stock dropped sharply on news, but has since rallied

When some analysts noted last Thursday (June 13) that options traders seemed to be signaling an imminent big move in biopharma stock Global Blood Therapeutics (GBT), the tip-off was exceptionally high implied volatility (IV) in the $50 put options expiring June 21.1

Because IV reflects traders’ expectations of future price action in the underlying instrument—e.g., how much a stock is expected to move in the next 30 days—low IV typically translates into relatively lower options prices, while high IV typically means the opposite.

Well, in this case, the IV watchers were spot-on. GBT, which closed at $57.52 on June 13, plunged more than 10% intraday on June 14 before trimming that loss to around -6.5% by the close, and its $6.44 range for the day was its largest in more than six months:

Global Blood Therapeutics (GBT), 3/12/19–6/18/19. Down pre-news, up post-news.

Source: Power E*TRADE


Although options activity—and especially big upticks in IV—can sometimes tip traders off to upcoming stock-price action, in this case pretty much everyone familiar with GBT expected shares to make a move last Friday because that’s when the company was scheduled to release the latest trial results for its sickle-cell disease treatment.

As the chart above shows, though, the stock had been moving plenty before the report, and it’s continued to move since, rallying more than 4% intraday yesterday. Has the market rendered its verdict on GBT’s latest data—that is, is it giving it a big thumbs up?

That’s something no one can ever know until after the fact. It’s worth noting, though, that GBT has now spent two days trading at least 2% above Friday’s low, and the Street appears to have remained long-term bullish on the stock: Yesterday TipRanks pegged the average analyst price target around $96, with a low target around $75.2

If yesterday’s price action does represent a sentiment shift, it wouldn’t be the first time a stock has pulled traders in one direction after a big piece of news only to surge the other way shortly thereafter. It’s also not the first time a stock has popped up on a LiveAction scan for a big decline in IV after the release of market-moving news:

LiveAction scan: Big 1-week implied volatility drop. IV falls 47%.

Source: Power E*TRADE


Because lower IV generally translates into lower options prices, bullish traders looking for more upside in GBT would arguably be in a better position to buy call options now vs. last Tuesday, since the scan showed IV was around 47% lower than it was a week ago.

Two things experienced options traders would likely point out about this: Yes, IV was down a lot, but it was down from a very inflated level, and the fact that the stock was up more than 4% for much of the day yesterday meant that call options prices were, overall, still probably relatively high. In fact, a quick check (around 1:30 p.m. ET yesterday) of the $55 calls expiring this Friday showed a last trade of $1.95—more than double their price from Monday.

Here’s the lesson: Traders looking to buy options when they’re relatively cheap can’t just look at current IV levels in a vacuum. In this case, GBT IV levels could continue to drop in the near term, which means potential call buyers who believe the June 14 low marked a turning point may have the advantage of being able to wait for a down day (or days) in the stock that would make these options relatively cheaper.

At the other end of the spectrum, traders looking to sell GBT options would want to strike before too much more of that formerly inflated IV evaporates.

Options have many moving parts, so to speak, and the more confidence you have that they are in sync, the better the odds of putting together a successful trade.

Market Mover Update: While its rally of more than 4% on Monday may have had something to do with it, Neogenomics’ (NEO) weak performance yesterday stood in stark contrast to the broad market (see “Intersecting trends”). On the other hand, a report from Barclays noted that health care stocks have tended to outperform when the Federal Reserve cuts interest rates.3

Yesterday’s hopeful signal from the White House on US–China trade negotiations4 halted a five-day skid in chip stocks in dramatic fashion. The PHLX Semiconductor index (SOX) jumped more than 4%, more than twice as much as the Nasdaq 100 (NDX) index.

End of the short squeeze? Beyond Meat (BYND) spiked 18.8% higher early yesterday, vaulting above $200, before reversing into negative territory (see “A (un)real meat market”).

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.), FOMC meeting announcement (2 p.m.).

Today’s earnings include: Winnebago (WGO), Oracle (ORCL).

 

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1 Zack’s.com. Options Traders Expect Huge Moves in Global Blood Therapeutics (GBT) Stock. 6/13/19.

2 TipRanks. GBT Global Blood Therapeutics. 6/18/19.

3 CNBC.com. One group of stocks has been a surefire winner when the Fed cuts interest rates. 6/18/19.

4 Bloomberg. Trump Says He'll Have ‘Extended’ Meeting With Xi; Stocks Rally. 6/18/2019.

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