Ebola and the Volatility of Market Speculation

Tekmira Pharmaceuticals (TKMR) is currently the only company in the world that has access to a potential treatment for Ebola. Due to the urgency of the current Ebola outbreak, the FDA has removed a hold on its development through its phase 1 clinical trials in hopes of allowing faster public access to the potential vaccination. For those of you not familiar, phase 1 clinical trials are the very initial process where an experimental compound sees its first tests on humans. Prior, all testing is done on animals with primates being the last before exiting preclinical status.

Shares in the company have exploded from its July low of $8.86 to close today at $23.80 after seeing intra-day highs of $26.00. That is over a 2.5x price increase in less than a month.

This serves almost as a perfect example for the speculative trading that the markets have evolved into in this modern age, and as always, there can be lessons learned. Let's take a closer look:

At the end today's trading day, Tekmira's 30-day forward looking volatility sits at a handsome level of 158, which represents a higher implied volatility than 100% of the time in its past. This can be roughly translated to "the markets are speculating a 30-day move in the stock price greater than any time in the history that TKMR has been offered publicly to trade."

Implied vol. mean index of Tekmira

All this speculation on a drug that has only been tested on monkeys. (Author's note: Having worked in pharmaceutical development, results in primates often times don't translate very well to humans.) That's not to say that the vaccination will not produce positive results in humans, and I hope it does, however the speculation that is rampant typifies high volatility-high momentum stocks that we are all familiar with from the NASDAQ in 2001 and Twitter this year. The markets are essentially "pre-buying" the stock in anticipation of the future cash flow Tekmira may potentially generate from successful application of their experimental vaccine in humans. This is often called "pricing-in" or "discounting".

Let's look at the skew chart for options in Tekmira:

The skew chart shows nearly only down-side risk for the company, both near-term and long-term. Essentially, the current price of the stock (arguably) already reflects the fact that their vaccination will be successful in humans, else there would be at least some up-side risk reflected. Instead, we see the volatility smirk instead of the smile (how appropriate the terminology). As of the end of today's trading day, by next March, the markets only expect the price of the stock to go down. How devious.

So what is the lesson? If you think that the vaccine will be successful in human studies, it is already too late to buy the speculation. In fact, if you had bought the stock today near its intraday high and the company eventually announces successful application of its drug, you will have lost money.

#ebola, #volatility, #risk, $TKMR, #tekmira