Elan Corporation, plc (ELN) is a neuroscience-based biotechnology company. Elan is focused on discovering and developing advanced therapies in neurodegenerative and autoimmune diseases. Elan’s business focuses on neurodegenerative diseases, such as Alzheimer’s disease and Parkinson’s disease; autoimmune diseases, including MS and Crohn’s disease and neo-epitope based targets for treatments across a range of therapeutic indications.
ANALYSIS
This is an elevated vol note on a bio-tech. I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.
Custom Scan Details
- Stock Price GTE $7 and LTE $70
- IV30™ - HV20 LTE 10
- HV180 - IV30™ LTE -8
- Average Option Volume GTE 1,200
- Industry isNot Bio-tech
- Days After Earnings GTE 10 and LTE 60
The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.
The ELN Charts Tab (two years) is included below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
I've included the two year chart for a bit of perspective. On the stock side, we can see how ELN was trading in the mid single digits a couple of years back and hit a two year high recently of $15.27. There was a pop on 5-25-2012 -- the news for that move is included below.
5-25-2012: Elan is seeing notable strength today following Chairman comments on Tysabri Alzheimer drug potential (14.33 +1.14)
ELN is trading nearly 10% higher following comments that included Chairman discussing potential for the co to become a takeover target. (Irish Independent)
Seeing strength following positive comments from CEO Kelly Martin regarding the drug Alzheimer's drug Bapineuzumab, of which the company has a 25% stake
Provided by Briefing.com (www.briefing.com)
On the vol side, we can see the abrupt rise in the implied of late. IV30™ was trading at 44.16% on 5-22-2012. As of this writing it's trading at 68.83%, or 56% higher. The implied is now well above the two historical realized measures. Specifically:
IV30™: 68.83%
HV20™: 52.01%
HV180™: 42.86%
It's these values that triggered the custom scan. But, the analysis becomes much more clear when we look to the Skew Tab, below.
Looking the front three months (red, yellow and green, respectively), we can see how the vol rises significantly as we go from the front to the back. This indicates a vol event (risk) that is more likely to occur in Oct than in Jun or Jul. Looking to the fourth expiry (Jan 2013), we can see that the vol drops again to the the Jul (ish) levels. This reflects the likelihood that the vol event is after Jul expiry but before Jan 2013. But, the rising vol right now (i.e. the Jul vol) does reflect the heightened possibility of news coming out inside that expiry. If there was "no" risk of news in Jul, that vol level would be closer to Jun.
Without having done very much research or news hunting at all, it's apparent that there is some sort of expected result or ruling on a drug that may have substantial impact on ELN going forward. Looking back to the vol portion of the Charts Tab above, we can see the vertical axis stops at 70%. Looking back to the Skew Tab, we can see that the near the money options in Oct are priced over 90%.
I do also note the upside skew shape to the Jul options, reflecting greater upside risk (potential) than downside risk. This may indicate two different news events coming out rather than one. Very tricky...
SUMMARY
Finally, let's turn to the Options Tab, for completeness.
We can see the monthly vols are priced to 55.1%, 74.69%, 90.62% and 77.36% for Jun, Jul, Oct and Jan'13, respectively. One last thing I noticed... Check out the Oct 30 calls worth $0.20 (mid-market). This is a $13 stock right now...
DISCLAIMER: This is trade analysis, not a recommendation.