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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Sam Citron who wrote (14151)	11/16/2004 3:05:42 PM
From: Biomaven	Read Replies (1) \| Respond to of 52153

Sam, I use a program called Open Interest: rpsw.com It's shareware - you get some time free and then have to pony-up $250, but I think it's worth it. Very nice for modeling complex option plays. One nice thing about the program is that it bases the implied volatility on the average bid/ask. You really have to watch out for sites that use last trade, which is often stale in the thinly traded options where we hang out, or on just the bid or ask which cna be very misleading. The CTIC smile is very unusual. For the March and June contracts (which are the crucial ones) the implied volatility is extremely high and very flat across all strike prices. (So no smile at all). Not sure I've ever seen anything similar. For those that that may not understand smiles, the key is that the Black-Scholes formula assumes a lognormal distribution of future stock prices. But in practice, prices have fat tales, and so lognormal isn't the right distribution. To offset this, people jack up the volatility of the strikes that are away from the money and make those options more expensive. If you plot the resulting implied volatilities you get a smile, with a low point at the current stock price and higher volatilities as you get further out. Now with CTIC, we are going to get a dramatic move, one way or the other. The options market agrees with this, as can be seen by the incredibly high implied volatilities. But I would expect say the March 15 calls to be comparatively more expensive than the March 7.5 calls, which is not the case. So maybe a trade something like selling the March 7.5's and buying the 12.5's (in some appropriate ratio) might be interesting. Others are welcome to chime in here. I sometimes think if I just took a couple of weeks off and really studied biotech options I could discover something luscious... Peter

To: Sam Citron who wrote (14151)	11/16/2004 3:44:25 PM
From: tuck	Read Replies (1) \| Respond to of 52153

You can go here for free: cboe.com and plug in your own data: the stock price, strike price, and expiration date. You also have to give some values for dividends (which is usually zero for biotechs), an interest rate, and a historical volatility rate -- but reasonable estimates of these are already in there. It will calculate the call and put prices, along with all the greeks. Hit the "volatility" button, put in the actual price (or as Peter suggests, an average of the bid/ask spread) of the option in question into it, hit "calculate", and voila: implied volatility. Cheers, Tuck