The options market can give hints at what traders are anticipating in the near and long term. One hint I like to look for is options that are expiring soon with high implied volatility. Implied volatility rises when traders are willing to pay a higher than expected price for a particular option contract. If someone is willing to pay a high price, it can be assumed that they are anticipating that option to be worth significantly more than they are buying it for before they expire. 

I like to sell these options as long as I can figure out what event everyone is anticipating and model the possible outcomes. A good case study right now is Prothena Corporation (PRTA). PRTA is a late-stage clinical company, focusing on discovery and development of novel therapies to treat diseases caused by protein dysregulation in the United States. Today it closed at $35.24 and its options have crazy high implied volatilities of over 300%.  

The at-the-money put/call contracts expiring in 9 days are selling for around $7.50! This suggests that option traders are anticipating a move of 21% either up or down in the next 2 weeks. 

The option chain is spread out too. There are currently bids of $.25 for the $17.5 strike price which would require over a 50% decline in the stock price in 9 days to not expire worthless. Conversely, there are equivalent bids for the $70 call which needs a doubling in the stock price. It is safe to say that these option traders are anticipating some event that will either send this stock skyrocketing or cratering out. My question is: what is it? 

Where do you look to answer this question? Leave a comment and let me know.

News?

The first place I look is the company’s news feed. Unfortunately, right now, the only news story is about an officer who sold 5000 shares 4 days ago. Insider selling or buying could and does move stock prices sometimes. But, since the market has been open since this news item came out and there hasn’t been a reaction, I don’t think this is what we are looking for.

Corporate Events?

Next, I look on the company’s corporate website to see if they have any events scheduled. This is also a miss. Prothena released their quarterly results last month on November 2 and they spoke at an investor conference on September 11. They do not have any upcoming scheduled events on their webpage and do not conduct conference calls in conjunction with their earnings releases. 

FDA Approvals?

Since this is a research pharmaceutical company, there might be a pending approval from the FDA which could cause a big change for the Prothena. In the November earnings release, the CEO said that they are “excited for initial topline results from our ongoing Phase 1 SAD and MAD clinical trials of PRX012, an anti-amyloid beta antibody, and our IND for PRX123, a dual amyloid beta/tau vaccine, by the end of 2023.”

This is the event we are looking for! The options expiring on Dec. 15th are the last options of 2023 and there has not been an announcement about any topline results. If a trader was hoping to bet on a big stock swing due to a drug trial announcement, this would be the way to do it.

Should I participate?

Warren Buffet says that investing is like baseball. You don’t have to swing at every pitch.It is very tempting to sell some puts at $17.5 being that it is a full 50% out of the money. Historically, this stock has gone down by 50% in 9 days just .25% of the time. Unfortunately, traders are anticipating a known event that has the power to do it. 

I don’t know what an anti-amyloid beta antibody is. I don’t know anyone who would know. A company insider probably knows and there has been a sale recently. Or, maybe they sold because they are retiring and scheduled the sale 12 months ago. I don’t know that either. 

All things making this a hard pass right now. I am going to take another look at this the day the news is released. There are going to be a number of traders looking to exit out of the money positions and I might be able to sweep up some premium then. 

What do you think? Where have I gone wrong?