The Secret to Seattle Genetics' Next Move Could Be Hidden in Options Activity

| About: Seattle Genetics, (SGEN)


Seattle Genetics' (NASDAQ:SGEN) stock price could experience some volatility this week as a result of an FDA advisory committee meeting on July 14th regarding SGEN's drug Adcetris, both as a treatment for systematic anaplastic large cell lymphoma ("ALCL") and relapsed Hodgkin's Lymphoma.


Like other biotechnology companies, the stock price is based largely on potential. The stock needs a positive outcome from this committee meeting or else the stock price could suffer. The company trades at a market capitalization of $2.34 billion. Between 2008 and 2010, the company's revenues grew 205% to $107.47 million. The company has been a consistent money loser, reporting a loss of $66.26 million in 2010. With cash and investments of around $450 million, they have liquidity to endure nearly 7 years of expenditures at the 2010 levels.


The company has an active exchange traded options market which offers some clues about what smart money thinks the stock will do this week. This Friday is options expiration so the July options are basically pure plays on SGEN's expected price move this week. The $20 strike is at-the-money and as such it is not surprising that daily stock volume is similar, but the open interest heavily favors the calls (9,992) over the puts (2,642). Maybe this is more reasonable than it appears. SGEN is trading near a 52 week high and these July $20 calls may once have been relatively low priced out of the money upside calls. As such, the current out of the money strikes may provide more insight.

The July $22.50 calls had volume of 486 contracts and 3,017 open interest on Monday. The July $17.50 puts had volume of 955 contracts and 5,652 open interest on Monday. This seems like a clear indication that the options activity sways bearish.

In subsequent months, the options volume and open interest has a strongly bullish bias. The August $22.50 call has open interest of 2,927 compared to open interest of 204 for the August $17.50 puts. The September $17.50 calls have open interest of 3,783 and the September $20 calls have open interest of 2,257.


Ultimately, we don't know what the future holds, but the options activity and open interest at least give us clues as to how others are investing in this company's stock. If the July options bias is any indicator, the stock move this week could be bearish. But investors should keep in mind that much of the stock's potential downside should limited by the company's massive liquidity relative to their annual losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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