Synta Vol Explodes On June Event; But Skew is Highly Irregular

Synta Pharmaceuticals Corp. (SNTA) is a biopharmaceutical company. The Company is focused on discovering, developing, and commercializing small molecule drugs to severe the medical conditions of the patients with cancer and inflammatory diseases.

This is a vol note on a tiny bio-tech (in terms of revenue) that clearly has an event due out within June expiry. We can examine the vol and then I'll show you the phenomenon that really caught my eye. It's quite odd in these types of situations and is an interesting perspective to analyze. For a company with $150K in revenue but a market cap of over half a billion dollars, yeah, there's some risk.

Let's start with the two-year SNTA Charts Tab 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 the equity was trading in the $ range less than two years ago, reached the $12 range earlier this year and has taken a rather abrupt drop from those highs to now ~$7.50. The stock is down 27% in May.

On the vol side we can see the IV30™ (the red curve) rocketing higher of late. In mid March (after earnings), the options were trading at 60% IV30™. In the last two months that level has risen more than 200%. Without reading a single piece of news we know a potential enterprise changing event is coming very soon.

I have included the three-month IV30™ chart in isolation below to better illustrate the vol rise.

Again, we see this in bio-techs when a study result or FDA ruling is due out. This isn't uncommon (though it is interesting). The weird part lies hidden in the skew. let's turn to the SNTA Skew Tab, below.

Here it is.. We see that the front month (red curve) is trading well above the second month (yellow curve), so the event is due out in this expiry rather than next (or so reflect the options). But, checkout that skew shape for Jun -- it's an upside down (negative) parabola, where the option market reflects less risk to the OTM options than the ATM options. In English, in particular to the upside, the option market reflects less likelihood of a large upside move than a small move (or even a downside move). Normally we see parabolic shaped skew in the other direction -- that is, OTM options on both sides show more risk than the ATM options reflecting two-tailed risk, or in English, the option market reflects ~equal possibility of really big bad news or really big good news.

I have included just one example of this parabolic skew below. This is for Dendreon (DNDN) (another bio-tech) on 2-27-2012.

Noe how the skew is a right-side up (positive) parabola. Again, this is more normal -- where the upside and downside OTM options reflect two-tailed elevated risk.

Finally, let's turn to the Options Tab.

Across the top we can see that Jun vol is priced to 190.83% and Jul vol is priced to 156.285 -- again, Jun is the month with the vol event. For a company with $150K in revenue but a market cap of over half a billion dollars, yeah, there's some risk.

Disclosure: This is trade analysis, not a recommendation.

Images provided by Livevol®