Re: The real cause of pps appreciation... OPTION PRICING binary
Now look at the Open Interest. You can see the OI for July ARNA is twice that of Oct. oct has time premium and hedge (a delay?) premium that July doesnt. I won't totally discount your theory but the OI indicates a lot of conviction for an on time approval.
As I posted easier, and this idea was given to me, if you think about the shorting and the option pricing, you could see that before the AdCom shorting 1 share and going long 2 $3.50 or $4 calls was the way for professionals to play this. The VVUS delay (and panel vote) may have caused some confusion and pain bringing on this split in strike dates. But do the math.
-You shorted the stock in the $2 area
-You bought 2 calls for every share short in the 50 cent range.
-This was almost a no lose play.
: You got a $2 credit on account and used half of it to buy 2 calls, one as a hedge 1 for profit
: If the AdCom vote or FDA decision was no, the stock would fall to about $1 immediately, and you are at breakeven - no lose. You could hold the short longer and it probably would have gone to 80 cents or lower, giving you a small profit.
/ If the AdCom vote was positive, you cover the short with one call, and use the other call for profit.
/ your short share is hedged at $3 or $4 or $5 with one of your calls, so now it is in your interests to see a high share price to increase the value of our other long call
Running the math, short 1 share at $2 covered at the $4 strike price is a $2 loss, so being long at $4 strike with the stock at $6 is breakeven. You want the stock higher than $6.
So you could reverse your theory around and speculate that the reason we may be trading in this range is because that is where the equilibrium is. That is where the short calls and long calls break even, and until we get a decision we are at stalemate. After the decision the stock will move. In other words, the options pricing is not telling you where the stock will go but explains why it is where it is.
It won't correlate to VVUS because the dynamics are different vis a vis the short interest and the drug(s) up for decision and the market sentiment for each drug.
Just a thought.