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Minyan Mailbag: Amgen Volatility


Have you noticed the persistent decline in AMGN's share price (down 10 days in a row and down 12 out of the last 13 days) along with the sharp increase in implied volatility in its options?

The IV started to move higher before AMGN's share price moved lower (in fact, the share price went a little higher while the IV started to move higher). Although I'm not certain, I would think that makes the move in IV less important (I would feel more comfortable "betting" on the downside if the IV jumped while the stock began its move lower).

This move in IV is large, even when taking into account the fact that AMGN has an upcoming earnings announcement. Perhaps people are expecting another big move like AMGN had with their last EPS announcement.

I would like to see how it performs now that all of those analysts came out and defended the stock yesterday.

Ryan Orlando

Amgen may be a good company, but its stock price is "rich" at 25 times earnings.

We love the combination of very cheap options and high valuation in a stock price to buy volatility. We may make nothing, but the odds are good that the high valuation means too many people are crammed into a stock. When good things happen they cram into it more and outsize their risk; when bad things happen they can defend all they want, but they usually finally turn sellers. That can be interesting.

Trading volatility profitably involves not only identifying good positions, but also in properly re-hedging. Once a stock begins to move, it takes a while and lots of consternation for it to slow back down.

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