The VIX declines, Arena Pharmaceuticals (NASDAQ:ARNA) surges
Today's Financial News - Posted December 8, 2008
The volatility in the equities markets has started to diminish. The days of 600-point declines and surges appear to be behind us. That is good news for options investors looking to take advantage of traditional plays. Take the opportunity to check out Arena Pharmaceuticals (NYSE:ARNA).
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): This may turn out to be the week options traders have been waiting for. Since this economic crisis began to unfold in early September, the CBOE’s volatility index (the VIX) has soared to record levels. Only recently has the upward pressure begun to wane.
Today, the situation for the VIX is looking quite intriguing. The highly watched index found the momentum to drop below its 50-day moving average. The VIX is currently indicated at 58.93, just below the moving average’s level slightly above the 60 level.
This is only the second time since the end of August the index has traded below its 50-day average. The last time was in late November and the trend lasted for just a few trading sessions. If today’s drop below the resistance level stands up, it will be an indicator of positive action to come.
What does it mean?
As a derivative indicator, the VIX is simply a mirror of what the overall market is doing. By itself, it has no inherent fundamental value. When it declines, it simply tells investors that volatility in the overall market is on the decline.
For average buy-and-hold investors, the VIX has little importance other than telling them the volatile, nausea-inducing ride that is the equities market is beginning to calm. But for options investors, a falling VIX proves that options prices are falling and the spreads between put and call premiums has narrowed significantly. After all, that is what the indicator is designed to tell us.
For the past few weeks, it has been difficult to implement many traditional options plays because implied volatility (the premium added to an options selling price) has been so high. An underlying stock needed to make a sizeable move for the play to pay off. But now that volatility is on the decline, options prices will drop and the profit potential will return. In other words, we can get back to traditional options strategies.
One company worth watching is Arena Pharmaceuticals (NASDAQ:ARNA). In case you missed the news from this $289 million biopharmaceutical this morning, the company just announced clinical testing results for its closely watched obesity-fighting drug, lorcaserin. Of the 469 obese patients in the trial, a statistically significant proportion of them lost more than 5% of their body weight when compared to testers that received a placebo treatment.
While the drug still has a way to go before reaching the market, this is good news for the company in a highly competitive market. So far today, share price has risen by over 10%.
Options investors looking for a trading idea should look at the company’s January 5.00 calls (UGGAA). Trading for just $0.15, these options have a strong shot at profits as more investors learn of the good news surrounding this company.
As the VIX surpasses its recent lows, more and more options trading opportunities will arise. Keep your eye out for high-potential plays and take advantage of the market’s latest trends.
Next Article: The trouble keeps adding up for Russia
Be the first to leave a reply.
Your comments are welcome
Follow TFN via RSS or Twitter |
 |
 |
 |
Advertisement
Latest Headlines
- The Big Picture for Sinobiopharma, Inc. (SNBP)
- Beazer Homes USA, Inc. (BZH) and Hovnanian Enterprises, Inc. (HOV) up despite horrid housing news
- The FDA catalyst: 2010 moves in MannKind (MNKD), Roche Holding (RHHBY), Acorda Therapeutics (ACOR) show it still works!
- Steepest drop since Feb. 2009: Here we go again!
- Is the silver run over? Coeur d’Alene Mines (CDE), Silver Wheaton (SLW), Alto Group (ALTO), Hecla Mining (HL), Endeavour Silver (EXK) close down