Human Genome Faces Binary Event

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No -- the chart below is not a misprint. Volatility is going through the roof in Human Genome Sciences (HGSI). It's binary event time next week, as Steven Sears explains in the Striking Price:


 

On Wall Street, traders use options, which often cost about a handful of coins, to wager on "binary" events.

Human Genome Sciences is, according to the JPMorgan analyst who follows the stock, facing a "highly binary" event.

Before European markets open Monday, Human Genome Sciences and partner GlaxoSmithkine (GSK) are expected to report the much anticipated data from the second of two Phase 3 trials evaluating the efficacy of Benlysta, a drug that treats lupus. Cory Kasimov, who follows Human Genome Sciences, assigns a 70% probability of success.

Benlysta would be the first new lupus treatment in decades.

And binary it is. The November 20 straddle trades at about $8.50. Or if you prefer strangles, how about the November 15-25 for $4.20 or so?

Basically, it sounds like one of those situations where the stock might double or halve, although half seems more likely as the options board suggests this analyst is correct and good news is somewhat baked in already. November 30 calls are "only" about $0.65. I suspect if anyone really thought HGSI would double Monday than these are quite the spec. buy.

Now you really have no odds selling huge options volatility ahead of an event like this. So long as they actually make an announcement, the stock will move. But by the same token, do you feel comfortable buying an ATM straddle with three weeks to go at a price that's 40% of the stock price?

I just can't pull the trigger on something like that. I'd really suggest splitting the middle, so to speak, and using vertical spreads. If I want to bet a direction, I'd just buy a bull call spread, like the November 20-25 -- something along those lines. Even buying both call and put spreads can work depending on the specifics as everything often just goes right to parity.

I don't love mixing expiration cycles as time value can change enormously in one little news blurb. So in other words, I'm careful with calenders as one cycle's volatility can completely disjoint from the rest of the board.

No positions right now, but I'll look more closely today.

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