GNTA high IV

I think the best way to play all biotechs is by betting against them. I think by putting on a cheap put backspread for a credit if you can will give you some nice upside if you do a lot of them. My logic is that if you do it for a credit and the drug gets approved, fine, you keep the credit and move on. If it doesn't have good news, these stocks almost always get a 50% haircut, seems to be the standard formula these days. So even if you only get 2 out of 10, the strategy pays for itself. Your only risk in these situations is getting a mild reaction to the report. But you could filter some of these out by how rich the premium is. The premium seldomly lies in terms of magnitude of expected move.

I find betting on approvals in biotechs to be very challenging. I have seen too many companies come out with great news only to have some analysts question the trials, question the data, the validity of the data, the statistical significance of the data, blah, blah, blah. But they still kill the stock. Even on good news, in many cases, just because the data is confusing and not conclusive either way. So, I would just assume bet against them. Like I said, with the rich premium, putting on the backspreads for a credit is not too hard. That is in my opinion the optimal way to play them.
 
Quote from Maverick74:

I think the best way to play all biotechs is by betting against them. I think by putting on a cheap put backspread for a credit if you can will give you some nice upside if you do a lot of them. My logic is that if you do it for a credit and the drug gets approved, fine, you keep the credit and move on. If it doesn't have good news, these stocks almost always get a 50% haircut, seems to be the standard formula these days. So even if you only get 2 out of 10, the strategy pays for itself. Your only risk in these situations is getting a mild reaction to the report. But you could filter some of these out by how rich the premium is. The premium seldomly lies in terms of magnitude of expected move.

I find betting on approvals in biotechs to be very challenging. I have seen too many companies come out with great news only to have some analysts question the trials, question the data, the validity of the data, the statistical significance of the data, blah, blah, blah. But they still kill the stock. Even on good news, in many cases, just because the data is confusing and not conclusive either way. So, I would just assume bet against them. Like I said, with the rich premium, putting on the backspreads for a credit is not too hard. That is in my opinion the optimal way to play them.
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Good idea. Do you typically go with front month options for the backspreads or go 3-4 months out? And what if no favorable skew exists, making it necessary to use ratios that aren't that attractive in order to generate a credit?
 
Quote from Hello_Dollars:

Good idea. Do you typically go with front month options for the backspreads or go 3-4 months out?
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Front month. You want as much gamma as you can get and less vega.
 
Mav - the terminology seems to be different between the US and the UK. I'm guessing you mean a ratio backspread - i.e. sell 1 ATM put and buy 2x OTM puts, rather than the UK definition of a backspread which is equal nos of longs and shorts?

I see the sense of what you're saying, but given that IV normally implodes after results, and you are net long with a ratio backspread, doesn't that hammer the position, esp in the near month, if there is just a small fall in share price?

Having said that, a ratio put backspread would have worked well with GNTA, and provided it was placed for a credit, would have been OK for OSIP as well.
 
Quote from AngusP:

Mav - the terminology seems to be different between the US and the UK. I'm guessing you mean a ratio backspread - i.e. sell 1 ATM put and buy 2x OTM puts, rather than the UK definition of a backspread which is equal nos of longs and shorts?

I see the sense of what you're saying, but given that IV normally implodes after results, and you are net long with a ratio backspread, doesn't that hammer the position, esp in the near month, if there is just a small fall in share price?

Having said that, a ratio put backspread would have worked well with GNTA, and provided it was placed for a credit, would have been OK for OSIP as well.
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Yes, 1 x 2. In the US, any spread that is net long options is considered a backspread. So yes, sell the near strike, does not have to be the ATM, and buy 2 further out strikes. The vol implosion is a non event due to the relationship gamma and vega have with price i.e if you are expecting a big move away from the strike, gamma and vega is centered around the strike itself.

Your position will basically act like a net long or short underlying. Backspreads are most useful when you are expecting a quick move and you know when that move will come such as with earnings or FDA meetings.
 
Thanks Mav. I guess also that by playing the downside there is less risk of an IV crush - there was little with GNTA - and if the stock rises, then you have the credit in the bag and the IV crush doesn't matter.
 
Quote from Maverick74:

... The vol implosion is a non event due to the relationship gamma and vega have with price i.e if you are expecting a big move away from the strike, gamma and vega is centered around the strike itself.

Your position will basically act like a net long or short underlying. Backspreads are most useful when you are expecting a quick move and you know when that move will come such as with earnings or FDA meetings.
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Mav,

Would you agree that because we're using front month options (t <= 30 days) where vega and gamma are low especially for ITM and OTM strikes IV movement (up or down) will have minimal impact on the position? The concern would be the effect of theta decay.
 
I'll only add that front month backspreads have a ton of convergence-risk to the long strike. The theta inverts at the long-strike so a static representation of the theta-pos doesn't always tell the story. As has been stated, you need a quick/large move in the shares as is reflected in the gamma-position at the long-strike.

The problem with backspreads is that they always look good when SharePrice=ShortStrike, and always look their worst when SharePrice=LongStrike.

Backspreads are suitable when the atm straddle is too ridiculous to consider. OSIP call backspreads/wrangles and straddles made similar returns, but the backspread/wrangle was a far more prudent play.

Certainly in retrospect the put backspread was the play to be in with GNTA. I held no overnight option positions in this stock.
 
Quote from marc6001:

riskarb,

I agree with you but am not clear on the term "convergence-risk"
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Movement to the long strike near expiration in which the short deltas approach (-100) and the long options approach 50 each(+100). There is zero decay on the short options and peak-decay on the longs. Granted, the gamma is highest in the long options, BUT at the long strike you're essentially long a synthetic straddle. The closer you get to expiration, the more it will replicate a long straddle.

IOW, loads of decay...
 
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