VirnetX Breaches New Annual Low, Week After Catastrophic Legal Decision

VirnetX Holding Corporation (VHC), is engaged in the business of commercializing a portfolio of patents.

I last wrote about VHC on 3-11-2013. You can that post here.

VHC just had an absolutely catastrophic ruling come against them with respect to a patent infringement lawsuit they were prosecuting against CSCO. In short, they lost, even though the firm (VHC) had won something similar against AAPL prior. The stock has cratered since then… But today the stock is down another 10% and has breached an annual low. Further, I found VHC using a real-time custom scan that hunts for vol gainers on the day, and it’s on the very short list.

Custom Scan Details
Stock Price GTE $5
IV30™ GTE 30
IV30™ Percent Change GTE 10
Average Option Volume GTE 1,200
IV30™ Change GTE 7

The goal with this scan is to identify names with rising IV30™ that also have a reasonable amount of liquidity in the options (thus the minimum average option volume) and enough strikes to spread and thus a minimum stock price. I also require a minimum vol level in order to avoid any boring ETFs (or whatever).

The one-year VHC Charts Tab is included (below). The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


If we look at that stock chart we can see not only the recent implosion, but the continued stock drop from that implosion (including yesterday’s ~10% drop). The price yesterday hit a new annual low. But, this is also a vol note, so let’s check out the IV30™ chart in isolation for the last year.

That recent dip in the implied occurred after the bad news (court ruling) and it has now turned back up on yesterday’s stock drop. Given the recent news on this stock, I just don’t understand how it could have been priced in the 70% vol range, and quite frankly, 90% doesn’t exactly feel high (though it’s definitely more befitting than 70%).

Finally, let's look to the Options Tab (below).

Across the top we can see Apr vol is priced to 94.13% and May is priced to 84.79%. In fact, the entire vol term structure shows reduced risk monotonically was we move to further out expirations. To more clearly demonstrate this phenomenon, I have included the Skew Tab for VHC as of yesterday below.

We can see how the further we go out in time, the lower the vol. For now I say, 90% implied feels a lot more like fair value than the 75% (or whatever) it was a few days ago.

Disclosure: This is trade analysis, not a recommendation.

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