Schaeffer's Trading Floor Blog

Why MannKind Corporation (MNKD) Bears Aren't Panicking

The options market tends to overprice bets on MNKD

by 7/1/2014 1:18 PM
Stocks quoted in this article:

Biopharmaceutical firm MannKind Corporation (NASDAQ:MNKD) has emerged as a popular target for bears in recent weeks. During the past 10 days, the stock has racked up a put/call volume ratio of 0.52 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio registers in the 80th percentile of its annual range, suggesting puts have been in greater demand, relative to calls, only 20% of the time during the past year.

Elsewhere, short interest on MNKD has been soaring. The number of shares sold short has ballooned by roughly 21% since the start of February, and now represents a steep 28.7% of the stock's float. At the equity's average daily trading volume, that translates to nearly one week's worth of pent-up buying pressure.

Some of these bears likely caught a scare yesterday, as shares of MannKind Corporation rallied 9.6%. The bullish momentum was sparked by the late-Friday FDA approval of MNKD's inhaled diabetes treatment, Afrezza.

Despite the FDA-inspired boost, though, MNKD bears don't seem to be panicking just yet. In fact, the shares have shed 4.8% this afternoon to trade at $10.43, giving back a chunk of Monday's advance. A negative note from MLV & Co. is also playing a role, as the brokerage firm downgraded the stock to "hold" from "buy" ahead of the opening bell.

It's interesting to note, also, that MNKD rallied up to $11.48 yesterday before pulling back to settle at $10.96 -- just below the $11 level, which happens to coincide with MLV & Co.'s upwardly revised price target. The $11 area previously served as support for MNKD, but has acted as a stubborn technical ceiling since it was breached in 2007. The stock's inability to break out above this area in the wake of its recent regulatory win suggests that resistance here isn't weakening just yet.

Monthly Chart of MNKD since July 2004

Meanwhile, no matter their technical forecast, options players might be wise to avoid MNKD altogether. The stock's 30-day at-the-money implied volatility is currently docked at 83.2%, well above its 30-day historical volatility of 71.4%. In other words, option premiums are running high right now.

Looking back over the past year's worth of data, it seems like pricey options are par for the course on MannKind Corporation (NASDAQ:MNKD). The equity's Schaeffer's Volatility Scorecard (SVS) stands at a slim 8 -- suggesting the options market has tended to overestimate the stock's likelihood of making big, dramatic moves.


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