Replies to post #386214 on Anavex Life Sciences Corp (AVXL)

[Doc328]

Selling these calls at good prices is a little tricky, but I start at bidding high and gradually cancel and replace with lower prices, but still at a good premium, until I get filled.

Option buying and selling is difficult during times of extreme volatility (Dec 2 options have an implied volatility of 800 vs historical volatility 80-100 3 days before expiration). I've only seen IV > 800 a few times. GME got > 1000 at the peak of craziness. Black Scholes is not perfect estimating the mark at extremes. During high volatility, market makers will widen the bid-ask spreads to lower their risk as they need to take the opposite side of each trade and want to be compensated for the risk of not efficiently matching buyers and sellers. This is especially true if option volumes are low (as for AVXL). Sometimes you have to do price discovery as you were doing. Looking at the Level 2 often tells you where the market makers try to set the price (ignore the 1-10 contract size bids/asks from retail). I usually start 2/3 in my favor and march down by dimes from there.

and why the high option premiums with only days to go to expiration?

Though imperfect, ideal option price can be estimated with the Black-Scholes or related formulas. Volatility is the one variable that is not observable -- we unequivocally know the underlying price, remaining time, interest, etc. During calm times, historical volatility is a good estimator of future volatility (so it's reasonable that a Biotech -with larger price % swings - will have higher option prices than a revenue generating Big Pharma). With binary events that could make or break a company, Investors are willing to bid up speculative calls and protective puts. Implied volatility is 'solving backwards' taking the option price and then figuring out what volatility led to that price and is an estimator of the upcoming volatility at the time of the binary event. Actual future volatility that day is anyone's guess but based on how much people are overpaying for long options, the market maker's are estimating that AVXL will move +/- almost $6 by end of expiration Friday --- or the price will be either $3-4 or $15 (price estimated to be within 1 std deviation up or down 68% of the time). This move can be estimated by taking the long straddle price at expiration ($9 call is $2.70 and $9 put is $2.60 with $5.30 a good estimate of the expected move. TDA tells you the calculated MMM (Three yellow MMM's on the top bar). The effect of sky high implied volatility (IV) is that far out of the money calls and puts have value. Within minutes of the public TLD release likely by PR Thurs AM or just before the presentation, volatility will collapse from 800 and over a couple hours to 100 as all available data is digested. Therefore, we could see the stock go to, say 16 on good news but the 15 strike call actually loses money as IV plummets.

Best of luck with your option trades. I'm happy with my current proportion of uncovered to covered shares but sold $4 and $5 far out of the money puts as these should be easy to rollout 2 weeks (calendar) for a nice premium if SP drops to 4-5 maybe several times and I'll just pocket premium if price moves up. This is fairly low risk for gain.

[Jager997]

One day an investment book will be written describing all the strange stock trading activity we have witnessed over the past eight years. It will also show examples of clues provided in message board posts. The title: “Finding the Next Anavex Life Sciences”

[sab63090]

Short sellers use these out of the money (OTM) options to hedge their short inventory, it's insurance for them and fairly cheap...

I always wait for the short interest report to see how the current action relates to high activity, so my guess is that there will be insight this time since this report comes out on December 9th and will cover the activity up to November 30th....we are always 10 days behind.

I always consider that option activity (especially short puts which are also a "hedge" for shorts)...

This is like 3 Card Monte....lol

[dennisdave]

If there is one thing that I have learned when it comes to nonrevenue biotech investing over the last 3 years is that read-out of positive topline data is absolutely no guarantee for an SP jump. Anything related to a future of cash influx into the biotech (royalties deal, the buying in of big pharma, license deal, approval! etc) is. Look at NWBO. They reported positive topline data meeting all endpoints in an incredibly difficult trial for the orphan disease GBM, yet the SP declined! I have been laughed at, warning this may happen but the MB members were insisting the SP would increase to 4,5 even $20, and here it sits at 83 cents

Lesson is. Follow the potential influx of cash first and second the medical development of the drug in progress.