InterMune Inc. (ITMN) is seeing tremendous volume in the March options series, sending this specific month’s implied volatility skyrocketing up to 200+ volatility. More than 35,000 contracts are hitting the OptionsHouse hot list.
From the OH research tab, we see the likely reason why. InterMune is recently up $1.03 to $16.65. The FDA advisory committee is expected to meet and provide guidance to the agency regarding the approvability of Pirfenidone to treat idiopathic pulmonary fibrosis (IBF).
Today’s ITMN call option volume of 12,195 contracts compares to put volume of 2,637 contracts. February option implied volatility is at 67, March is at 174, April is at 165, and July is at 155, all versus its 26-week average of 92, according to Track Data. These readings suggest large price movement in March.
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Events such as FDA drug approvals can create binary situations during which most options theory is thrown out the window. A positive result here may send the stock above $25 per share; a negative might send the stock back below $10. Option theory is based on stocks trading and being able to be hedged dynamically, meaning if a stock trades from 16 to 25, it traded at every penny between those prices. Obviously, this stock will likely experience a gap when those findings are announced.
Based on this example, it appears that you cannot sell options in ITMN and think you are selling “high” implied volatility. There is no way to dynamically hedge the resultant position.
The risk to selling options is significant, theoretically unlimited, and is much more than the potential reward, which is limited to the premium received.
By Steve Claussen, contributor, ONN.tv
