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Stock option volumes soar for biotechs with Ebola drugs

Friday, October 10, 2014 - 06:38
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The newest twist in the business of trying to capitalize on the outbreak of the Ebola virus is playing out in the US equity options market - PHOTO: REUTERS

[New York] The newest twist in the business of trying to capitalize on the outbreak of the Ebola virus is playing out in the US equity options market.

Trading volumes have soared in the stock options of a pair of biotechnology companies thought to have promising treatments for the deadly disease which has claimed the lives of 3,865 people worldwide, according to the World Health Organization.

Canada-based Tekmira Pharmaceuticals, which is said to be furthest along among the companies working on a treatment, and Chimerix, whose experimental oral antiviral drug was used on the first US victim of the disease, have seen a huge increase in trading activity in their stock options.

Investors have been using the options market as a cheap way to bet on further gains in those two stocks, as well as other biotech stocks, with global health authorities battling to stem the spread of the disease. "It's just pure call speculators that hope that they (the companies) are going to find the cure and announce it tomorrow,"said J J Kinahan, chief market strategist at retail brokerage TD Ameritrade Holding Corp.

The flow of news about the spread of the Ebola globally has resulted in sudden and large moves in the share prices of biotech stocks.

On Wednesday, shares of Chimerix fell more than 18 per cent in 40 minutes after news of the death of Thomas Eric Duncan, the first person diagnosed with Ebola in the United States.

Chimerix's drug, called brincidofovir, which is in late-stage testing, had been used in the treatment of Duncan according to the Texas Presbyterian Hospital in Dallas.

Tekmira's stock gained about 13 per cent at the same time.

Tekmira's drug TKM-Ebola was reportedly used in treating Dr Rick Sacra, an American who was flown back from Liberia to Nebraska Medical Center. Sacra recovered though doctors say it's not known what role the Tekmira drug played.

An NBC News freelance cameraman Ashoka Mukpo is also being treated in the Nebraska facility for Ebola and has reportedly also received the Chimerix's drug brincidofovir.

Overall, Tekmira shares have risen about 126 per cent over the last three months while shares of Chimerix are up about 54 per cent in that time.

Trading activity in both the cash market and the options market has soared. Prior to August, Tekmira's daily volume was about 515,000 shares, while Chimerix averaged 312,000 shares. Since then, the average has been 6.51 million shares daily for Tekmira, and 966,000 for Chimerix.

Tekmira options volume totaled 356,065 contracts in August and September, nearly eight times the combined options trading volume in the stock for the first seven months of the year, according to Trade Alert data.

Options volume has been dominated by betting in call options, usually used to bet on more gains in a stock. Tekmira calls outnumbered puts by a ratio of 2.5 to 1 for August and September. Open interest in Tekmira options touched a new year-high of 96,7000 contracts on Thursday. "The positions opening in Tekmira options are growing very large and they are focused on the calls side," said Ophir Gottlieb, chief executive officer at Los Angeles-based Capital Market Laboratories LLC.

The activity in Tekmira is likely being driven by a mix of traders speculating on the upside and hedgers looking to protect their investments in the stock, said Kinahan.

As for Chimerix, prior to this week, options trading in this name was almost non-existent but nearly 10,000 contracts have traded so far this week, according to Trade Alert data. The daily average for the preceding three weeks was less than 100 contracts traded.

Other companies have seen elevated trading volumes in their shares, including BioCryst Pharmaceuticals, Sarepta and NewLink Genetics. However, their overall options activity has not changed all that dramatically.

Despite being the focus of so much attention, implied volatility, a measure of the risk of big moves in a stock, for some of the companies is at relatively average levels, BGC Partners, Inc equity derivatives strategist Jared Woodard said.

The 30-day volatility level on Tekmira is at 115.67 per cent, according to Livevol Inc, but that is about the midpoint of expected volatility over the last 52 weeks, in part because volatility soared in early August, shortly after two US aid workers were diagonosed with the virus. "The volatility is elevated, but it does not reflect an all-out panic of the kind seen when the Ebola news first broke,"said Mr Gottlieb.

Implied, or expected volatility for Sarepta is in the 26th percentile and BioCryst's is in the 33rd percentile of the respective 52-week ranges for the companies.

Heavy activity has also been seen in microcap stock Lakeland Industries, a maker of suits worn while handling hazardous materials. Shares rose 52 per cent to US$17.72 on Wednesday on more than 47 million shares traded, busiest in the stock's history.

- REUTERS