Replies to post #105200 on Biotech Values

[AlpineBV_Miller]

The option premiums don't reflect your pessimism though... I wonder why?

Because there is a retail sucker born every minute in the market for dev-stage biotech options?

[biomaven0]

The option premiums don't reflect your pessimism

Option premiums reflect neither optimism or pessimism - they reflect only the market's prediction of the stock's future volatility. Premiums for puts will always be at least as high as those for calls (could be higher if the stock is hard to borrow).

For biotechs you can sometimes derive some information about what the market is predicting from the shape of the implied volatility surface. For example, assume you knew a $10 stock had a 50% chance of going down to $5, a 40% chance of staying where it is, and a 10% chance of going up to $35 (so mean total expectation is correctly $10 if I've done the math right), then you would see that asymmetric distribution in the price of the call spreads at different strikes.

Peter