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Biotech / Medical : Biotech Valuation
CRSP 55.08-2.9%Dec 26 9:30 AM EST
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To: bio_kruncher who wrote (10522)2/20/2004 9:43:43 AM
From: Biomaven  Read Replies (2) of 52153
 
Thanks, bio_k.

Your first table produces an expected value of $28.84 - interestingly, within a dollar of where we closed yesterday.

Also be interesting to plug these numbers into some option prices - for example you can use them to approximately calculate what each of the March strike options are worth. I still haven't figured out a way to work backwards from the option prices to a predicted stock price distribution. It's easy to see thought that the predicted distribution is far from being normal - much fatter tails and pretty asymmetric.

In general, although the Black-Scholes formula is based on a lognormal distribution, actual stock prices distributions have fatter tails, even in the absence of a binary event like the one that is upcoming with SEPR. Actual out-of-the money options are thus more valuable than would be given by B-S with a constant volatility. So the fudge is to assume out-of-the-money options have a higher implied volatility.

It is my belief that if I were smarter and had the time to analyze all this better that there would be good ways to play these binary events with options. The simplistic "buy a straddle or strangle" is just too expensive. Also note that you need a pretty big edge to make money with these illiquid options - the spreads kill you on a lot of transactions.

Peter
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