Alexander Valtsev
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A Daredevil Trade In Novocure: Get On Board Before Earnings Come Out!

In yesterday’s episode of “The Week Ahead”, trader and educator Jonathan Rose gave a number of recommendations on option trades for the week (and longer periods, as well). One of the trades got my attention. The idea is to buy a straddle (simultaneously buying ATM puts and calls) on the shares of NovoCure Limited (NVCR). The good news is that the stock is very volatile. The bad news is that you only have about two hours before the market closes: the company is announcing earnings at 5PM today. The last time it announced earnings, the stock dropped by more than 10% (actually, this was a few days before the announcement on October 26, 2015). It is down over 30% since its IPO:

(Source: Google Finance)

My calculations show that the daily volatility (standard deviation) since the IPO is equal to 6.3%, which translates into a 34.5% monthly volatility and a staggering 119.6% annual volatility (I used calendar days in the calculations, not trading days)! It definitely sounds like options is the game here: you want the stock to be volatile as an options buyer. Well, sellers are also aware of that and they have priced the ATM options with the nearest expiration (March 18, 2016) accordingly:

(Source: Yahoo Finance)

As you can see, implied volatility (also on an annualized basis) for put options is higher than the historical volatility of 119.6%. This means that the options are a bit pricey. Also notice the well-defined downside skew.

Currently, the straddle will cost you about $1.50 per share (remember that the minimum transaction size is 100 shares, which is 1 contract). In order for you to make money, the stock will have to move either above $13.20 per share (the current price is approximately $11.70) or below $10.2 per share over the next 19 days. Either direction translates into a ~13% move in the underlying over the specified period of time. I think this is definitely attainable as the calculated standard deviation for a 19-day period comes to just over 27%:

(Source: Google Finance. Calculations by author)

One word of caution: keep in mind that these options are very sensitive to implied volatility. If it drops, your gains may be annihilated, even if the options move into the in-the-money region (of course, if they move wildly in-the-money, their time value will not matter so much).

Who has the guts to get into this trade? You have about one and a half hours left before it becomes obsolete!