Cephalon will not fall below 10 if the FDA rejects myotrophin, on the basis of call activity and interest.
Puts are important not only as indicators of market sentiment of future stock action ( ie to gauge sentiment re: the FDA decision), but also of the sentiment of the actual amount of movement expected in the stock.
An interesting example is with this week's action of Office Depot which was coming up on a decision from the FTC on an injunction regarding their proposed merger with Staples, which was expected to have significant action in stock price movement depending on the decision......so much so that it was reported on Reuter's on 6-27........specifically the action was heavily in July 15 and 17.5 puts, which were selling for about 3/4th and 2 respectively with a stock price of about 19 (similarly July 17.5 calls were selling for about 2/12, july 20's for 2). What was additionally interesting was the large institutional buyers were buying the 17.5 puts and selling the 15's, which turned out to be the correct move as the merger was blocked and the price dropped to the low 15's on Tuesday after the announcement meaning these buyers gained the premium of the appreciation of the 17.5 premium which climbed to about 3, and kept the premium on the sale of the 15 put as Office Depot has already climbed back to mid 16's and it would be likely that the July 15 puts will expire. Of equal interest is the 15 puts reduced in value from the prior day when the stock was selling at 19, to the following day when the stock fell to 15.
The action of the "knowlegeable" gave indication of their estimation ( and possible ability to manipulate) the stock movement....they couldn't have asked for a better movement.
The current value of Aug 10 puts is 5/8th, and Aug12.5 puts are valued at 1 3/8th (and with stock price at 11 1/4, this is almost entirely intrinsic value).......and no one is buying. Whether call option purchases are largely speculative, the value and lack of interest in the puts make me feel either no one has large sentiment on myotrophin rejection, or that myotrophin rejection will not result in as significant a value decline as to end up at 8 or lower.....I mean for $37.50/ contract, you would be rewarded with at least an appreciation to $200/ contract if stock price were to head to 8. An even bet (ie if rejection had a 50% chance),you are looking at a payback of over 5:1....and no one is interested in this bet? Either sentiment on rejection is much lower, or sentiment on stock devaluation is much higher than 8.
Conclusion: 1) No demonstration of rejection sentiment based on put action or open interest.
2) Rejection appears to create a drop to 10 at most. (We've already had the real drop which occurred 2 months ago)
3) CEPH a real steal at these prices......maybe get it a bit cheaper with rejection, but are you willing to chance missing the appreciation of approval for that extra buck if you wait? |
