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The founding members of Chimera Research Group have over 50 years of combined experience in the biotech and pharmaceutical sector. Their experience includes work at Investment Banks, Hedge Funds, Pharmaceutical Companies, top-tier Universities, and the U.S. Food and Drug Administration (FDA).... More
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  • APPY Options (Still) Appear Mispriced 0 comments
    Apr 21, 2010 6:14 PM | about stocks: APPY

    Last week I commented that APPY options appeared mispriced given the potential upside on positive results from AppyScore.  Based on today’s option volume, other investors/traders seem to agree.  Today, nearly 1,700 contracts traded on heavy share volume. To put this in perspective, today’s volume surpassed the entire open interest in APPY for all series, strikes and for both Puts and Calls. 


    Despite the recent increase in implied volatility (and therefore higher premiums), and based on the simple logic that I argued last week, APPY options still appear to misprice the potential upside resulting from positive results.  Here was my simple logic:


    “In January 2009, prior to results on AppyScore (which were ultimately viewed unfavorably by the market causing the shares to plummet), the market collectively valued APPY at $238 million (= fully diluted shares outstanding of 31.2 million(1) x $7.63 share price(2)).  Let’s assume this represents a base valuation for AppyScore and let’s also assume that the value of this technology has not changed substantially since January 2009.  If we take the $238 million value and divide by today’s fully diluted shares outstanding of 37.5 million(3), we get a price per share of $6.34.  Options are currently only pricing an upward move of around $0.75~$1.00 from Friday, April 9, 2010’s closing price of $2.33.  If results are positive, the shares should logically trade north of this $6.34 value at the very least (assuming our assumptions are valid).”


    Nearly 95% of today’s option volume occurred in the June 2.5 Calls(4) implying that the market is now decidedly bullish on APPY’s prospects.  Option premiums, however, still do not appear to reflect potential upside -- this situation may thus still represent a low risk / high reward trade for nimble Call option buyers. 


    Results are expected in the next several weeks as per company guidance.



    (1)  As of December 31, 2008.

    (2)  Closing price as of January 16, 2009. 

    (3)  As of March 5, 2010.

    (4)  Volume of over 1,600 contracts.

    Disclosure: Long APPY Calls at time of writing

    Disclosure: Long APPY Calls
    Stocks: APPY
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