Tekmira Pharmaceuticals and a Lesson in Stock Volatility

Tuesday, August 12 - Shares in Tekmira Pharmaceuticals (TKMR) imploded 22% after today's opening bell with a 3.75% drop after-hours. That's a single-day drop of nearly 26%. Put another way, the market capitalization of the company fell $130,000,000 in about 10 hours and put even another way, the market's perceived worth of the company fell by more than a quarter of its total worth from the time someone drank their morning coffee to the time they left work.

Yesterday, I talked about how one could extrapolate from the options skew that the only direction shares in TKMR could go from yesterday's close of $24 is downwards. Since then, Wall Street's expectations for the company changed again. Let's take a closer look:

Above is the options skew for Tekmira at the end of today's trading day. Below is what the skew looked like before today's opening bell.

Yesterday's volatility smirk has evolved into a slight grin and maybe even a smile after today's drop of about 25%. What can we extrapolate from this?

At it's current share price of about $18, the markets are starting to believe that shares in the company might be worth more. Remember from yesterday, we could extrapolate that Tekmira is worth approximately $23 a share to the market if we assume that their Ebola vaccine will successfully pass clinical trials and be available to the public. With today's development of more perceived upside risk in the company, we can extrapolate that the markets are starting to believe shares in the company might be undervalued at $18. But there is an extra factor that I didn't talk about at all yesterday that we now cannot ignore.

Tekmira reports earnings after tomorrow's closing bell. In the theoretical word of derivatives, the implied volatility of stock options in a company should increase as we approach quarterly earnings. However, we saw a 20% decay in the IV today. This, in my opinion, was probably due to the decay of euphoria surrounding the news of TKMR's Ebola vaccine fast-track status that hit the press yesterday. However, even considering today's decline of panic buying in Tekmira, I believe that the implied volatility should have still increased.

The implied volatility roughly translates to the market's expectations of how "volatile" a stock's price will behave in the near future. Considering that, after an implosion of more than 25% in a single trading day, shouldn't the implied volatility have gone up instead of down? Also, let's not forget that since yesterday, we are now less than 24 hours away from earnings.

That, of course, is how the IV should behave in theory but we all know that theory never fully translates to practice.

Queuing the at-the-money straddle for this week's expiry, we can extrapolate that the markets expect +/- $2.75 price movement in the stock by Friday's closing bell. Really? The stock dropped more than $5.00 today alone, not to mention that the company made a public offering in March of this year for $28 a share. Yes, $28.

Keep in mind, this is not a trade recommendation. I could be wrong and the markets may be efficiently pricing the risk of $TKMR properly. But they could also be not.

Place your bets on Wall Street.


$TKMR, #ebola, #volatility