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Inovio Pharmaceuticals Inc (NYSEMKT:INO): A Lesson in Implied Volatility

INO put sellers take advantage of inflated option premiums

by 7/23/2014 10:46:22 AM
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Short-term options were in high demand on Inovio Pharmaceuticals Inc (NYSEMKT:INO) Tuesday, per the stock's 30-day at-the-money implied volatility (IV), which jumped 10.2% to close at 175.1%. This reading arrived in the 94th percentile of its annual range, meaning the metric has only been higher 6% of the time within the past year. This pop had some option speculators selling to open front-month puts, hoping to profit from a drop-off in IV over the next several weeks -- a time frame that tentatively includes the company's next turn in the earnings confessional.

Drilling down, INO's August 11 put was one of the more active strikes in the stock's options pits yesterday, and the majority of the contracts traded at the bid price, pointing to seller-driven activity. Plus, IV jumped 5.4 percentage points at the strike, and open interest rose overnight -- two signs that new positions were initiated.

One goal for selling to open these puts is for INO to maintain its newfound perch atop the $11 mark through the close on Friday, Aug. 15, when front-month options expire. In this scenario, the puts will expire worthless, and the traders can retain the initial credit collected as their full potential reward. However, given the lofty levels of IV, the put sellers are more likely hoping for volatility to plunge in the wake of the company's quarterly earnings report.

In fact, at yesterday's close, IV for the August 11 put was docked at 204%. Comparing this to the stock's 30-day historical (realized) volatility of 55.9% suggests premium at this option is rather pricey at the moment, from a volatility perspective. While option buyers should avoid inflated premiums, it's an entirely different story for those looking to sell options.

With INO tentatively slated to report quarterly earnings on Friday, Aug. 8, a volatility crush could be in the stock's near future. Specifically, IV levels tend to fall after the uncertainty surrounding a scheduled event expires. In the best-case scenario for Tuesday's put sellers, IV for the August 11 strike will drop dramatically on the heels of the company's earnings report, allowing them to buy back the puts at a lower price -- and pocket the difference as profit.

If, however, the goal of yesterday's put sellers is for INO to maintain its footing atop the $11 mark, they will be pleased with today's price action. The stock has soared roughly 12% already today to trade at $12.45, after Inovio Pharmaceuticals Inc (NYSEMKT:INO) announced successful Phase II trial results for its human papillomavirus (HPV) immunotherapy treatment.


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