I wrote over the weekend about huge option premiums in Newfield Labs warning of a big move in either direction.
I did not know anything about the company or what was in the pipeline just that the option premium was stupid big, warning of something.
I have written a couple of times in the past that looking at the options market, even if you are not an options trader, can offer some utility.
I think NFLD's thing was a blood substitute. Well who wouldn't warm up to that kind of product? I know I would be a sucker for that kind story, I love a good story.
The premiums chronicled over the weekend were saying something. As I really knew nothing about the stock but the options premiums were saying something to people that would listen. My take was to stay away. My guess was not a big drop, my guess was a big move. Guessing that there could be a big move was easy based on the premiums. This was a great lesson for how useful options can be, again, even for people that don't trade them.
The chart may be tough to see but it captures the stock's decline in the last few days. Something like this will happen again and again. When it does, heed it.
13 comments:
so, i did not take my own advice and made another stupid option bet... for the life of me, i do not understand how i made money on it.
after you mentioned NFLD i kept it on my watch list. yesterday, as it dropped about 20% during the regular session, i placed a limit order to short 20 Jan puts at $5 strike for $.70 i got filled on $11.
i figured the "probability" of it going below $5 is zilch...
well, after the bell, i called in to listen to their conference call... and saw the stock trading around $5.20 After Hours and my heart sank.
de ja vu all over again... darn options...
any how, this morning, the put options were trading at $.35/$.40. I could not believe my eyes. I guess the IV was just taken out of the premium. I covered on the spot at $.35 and walked away with %50 gain.
It was a scary moment, but an amazing lesson in option pricing and Implied Volatility...
p.s. sorry about your accident, i had the same thing happen to me 5 years ago. Our car was totaled. The 16 year that almost killed us had the minimum insurance which was not enough to pay for all the damage... at least we have our health. puts things in perspective though.
er... i got filled on 11 contracts (not $11 per my post).
I think you have it exactly right. the news came, the uncertainty was gone and the juice deflated.
Biotech stocks seem particluarly prone to great stories that blow up. I dunno why exactly. Because they're neat, science on the march, etc.
I took me a couple scorchings to get over the great story thing.
Sami,
Do I understand correctly? You shorted puts on a falling stock?
i sold naked puts. It was NOT a smart decision, but let me explain my thought process. The premiums were VERY fat, as Roger noted earlier in the week. The stock had gone from around $17 to $14 in the previous six sessions, and then it took a 20% drubbing yesterday ahead of their conference call.
I convinced myself that the news must've leaked and that we've already seen the worst of it. I also looked at the multi-year chart and saw that we have not seen $5 in years.
so, i went ahead and "shorted," i.e. sold written naked puts, at the front month $5 strike.
It was a bad decision. Though i made money on the bet, it was not due to my analysis, i pure lucked out on it.
Unrelated comment:
The iPath MSCI India Index ETN appears to have started trading.
ipathetn.com provides a full prospectus.
I am still not sure I understand how an etn really works. Any thoughts Roger?
Thank you for your post.
CA
I shorted 10 contracts at 60 cents and covered at 40 this morning. Roger alerted readers about this and I sold naked puts because the chance it going below 4.40 was 10% according to my model. Made a nice little profit of this volatile biotech. I will most likely sell 50 contracts naked next time an opportunity liek this comes around.
S
ETN's I hear have the purpose of being more tax efficient...and providing dividends. Is this close? If so would it be redundant to have this in an IRA?
An ETN is not necessarily more tax efficient although it might be because it doesn't have to pay dividends and the ETN structure allows taking physical possession of an asset (how it is taxed is up to the IRS and AFAIK they haven't issued a definitive guideline although I could be wrong about that).
An ETN is basically a bond with ETF-like properties, an alternative way to approach certain markets such as commodities that may be less liquid, more difficult to securitize, etc. -- a "pro" of an ETN is that it has a maturity or "face" value like a bond but otherwise tracks an index until maturity (in essence it's outcome is known and it should have little or no index tracking error); a "con" is that the investor does not own a share of the underlying asset(s) and the maturity value depends upon the credit strength of the issuer -- see http://www.investopedia.com/terms/e/etn.asp
Roger, where did you find out about these expensive NFLD options?
I reader left a comment about them over the weekend, he said he had sold some options on the stock so I took a look.
So much fun for selling puts in a down market! When I first suggested selling puts in a range-bound and down market, some one called this stupid! I guess being stupid is better than being ignorant. Sami got it right you have to know the probability of hitting your contract price before you sell the puts. I wish sami can share his probablity calculation. Is it free? I have used 4 x SD bands but in the case of NFLD it exceeded that.
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