Amarin Corp: Rumors Break Vol; Risk Elevated -- Skew Diverges

Amarin Corporation plc (AMRN) is a clinical-stage biopharmaceutical company focused on developing improved treatments for cardiovascular disease. The Company’s development programs capitalize in the field of lipid science and the therapeutic benefits of essential fatty acids in cardiovascular disease.

This is a vol note (obviously), as the wave of bio-tech takeovers (and rumors) continues to build. Let's start with the news snippet that's pushing vol.

10:48 EDT Rumor: Amarin moves up on renewed takeover chatter

Source: Theflyonthewall.com via Yahoo! Finance.

OK, that was kinda terse, but we get the idea. Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see that within just a few months AMRN has gone from a $6.03 close on 12-15-2011 to now $10.05 -- that's a 66.7% rise. The 52 wk range in stock price is [$5.99, $19.87], so volatility kinda comes with the territory.

Looking to the vol, we can see both the meteoric rise today in the implied, and how "quiet" the underlying has been of late. As of right now, the HV20™ is 55.64% while the IV30™ is 100.58%. Said differently, the last twenty trading days have seen the stock move at a 55% vol clip (annualized) while the options reflect for the next 30 calendar days (~22 trading days) a vol almost twice that. So, the quiet period is over according to the options. The 52 wk range in IV30™ is [61.50%, 128.78%], putting the current level in the 57th percentile.

This vol story gets really interesting when looking to the skew.

I've included four expiries for sake of comparison. We can see how dramatically different the risk profile looks through the options when examining the short- versus the long-term. The two front expiries show reverse skew, where the OTM calls are the most expensive options. The back two expiries show the opposite -- where OTM puts are most expensive.

I've included the Skew Tab from one month ago (3-26-2012), below.

We can see a few differences from today's skew:

1. A month ago, the Sep options were vastly more expensive than the front three expiries across all strikes.

2. A month ago, there was a monotonic vol increase from the front to the back.

3. The front three expiries showed a flattish skew (Apr had that one super bid OTM call).

Without having done any research on this firm, it's apparent to me that as of a month ago the big "valuation changing" news was due out in Sep. As of today, that vol diff has essentially evaporated to the front, and the near-term reflects substantially more upside risk (potential) than the back months. In English, the takeover rumors and actualizations in this industry have changed the risk profile for this firm quite substantially, and there's no easier way to see it than in the options.

Let's turn to the Options Tab for completeness.

Just looking at the top of the Tab where the monthly vols are displayed: 102.45%, 97.82%, 110.33% and 103.31% for May, Jun, Sep and Dec, respectively. The greatest vol diff now lies in between Jun and Sep -- an interesting but logical result. If there's gonna be a takeover, the "risk" is in the near-term. If not, the risk goes back to the news / results / updates due out in the back months. Pretty cool...

Disclosure: This is trade analysis, not a recommendation.