About this Author
DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

Chemistry and Drug Data: Drugbank
Chempedia Lab
Synthetic Pages
Organic Chemistry Portal
Not Voodoo

Chemistry and Pharma Blogs:
Org Prep Daily
The Haystack
A New Merck, Reviewed
Liberal Arts Chemistry
Electron Pusher
All Things Metathesis
C&E News Blogs
Chemiotics II
Chemical Space
Noel O'Blog
In Vivo Blog
Terra Sigilatta
BBSRC/Douglas Kell
Realizations in Biostatistics
ChemSpider Blog
Organic Chem - Education & Industry
Pharma Strategy Blog
No Name No Slogan
Practical Fragments
The Curious Wavefunction
Natural Product Man
Fragment Literature
Chemistry World Blog
Synthetic Nature
Chemistry Blog
Synthesizing Ideas
Eye on FDA
Chemical Forums
Symyx Blog
Sceptical Chymist
Lamentations on Chemistry
Computational Organic Chemistry
Mining Drugs
Henry Rzepa

Science Blogs and News:
Bad Science
The Loom
Uncertain Principles
Fierce Biotech
Blogs for Industry
Omics! Omics!
Young Female Scientist
Notional Slurry
Nobel Intent
SciTech Daily
Science Blog
Gene Expression (I)
Gene Expression (II)
Adventures in Ethics and Science
Transterrestrial Musings
Slashdot Science
Cosmic Variance
Biology News Net

Medical Blogs
DB's Medical Rants
Science-Based Medicine
Respectful Insolence
Diabetes Mine

Economics and Business
Marginal Revolution
The Volokh Conspiracy
Knowledge Problem

Politics / Current Events
Virginia Postrel
Belmont Club
Mickey Kaus

Belles Lettres
Uncouth Reflections
Arts and Letters Daily
In the Pipeline: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

In the Pipeline

« And Another Thing | Main | A Treadmill Pill? »

April 12, 2002

A Less-Than-Subtle Plan

Email This Entry

Posted by Derek

It seems that someone got very lucky just before the bad news hit at BMS (see the April 4 posting below.) That's one explanation, and I hope that whoever it was is ready to defend it.

Today's Wall St. Journal reports that the day before the profit warning, some serious option transactions took place in BMS. Ten minutes before the close, orders came in to buy thousands of put contracts, at strike prices of 35 and 40. This was a most unusual spike in volume.

For those who aren't into options, that was a heavy bet that the stock price would fall. Option contracts have a built-in time limit. Each contract gave the holder the right to sell BMS stock at a set price ($35 per share for some of them, $40 per share for the others) at any time before April 20. When those were bought, the stock was at 37, so the right to sell at 40 for the next three weeks is worth at least $3 (the instant profit you could make by buying the stock and selling it at your locked-in price.) In practice, it's worth that $3 plus some extra premium. That extra depends on how long the option's good for and how volatile everyone thinks the stock will be.

Meanwhile, with the stock at 37, the right to sell at 35 isn't worth too much - just the premium based on the chances everything thinks it might have to actually go that low in the time remaining for the option. The only reason you'd buy an "out of the money" option like that is if you expect the stock to drop below 35 in pretty short order. At the very least, even if you don't believe that personally, you must think that a lot of other people are going to believe it, and soon.

Of course, this little transaction (which at its peak value could represent the selling of about 37 million dollars of stock!) paid off very well indeed. BMS promptly closed at about 32 the next day, and has dipped below 30 since. Those options have returned many times their original worth (although it's hard to tell if they're still being held, or held by the original buyers.)

This is the transaction for someone who's not satisfied with a measly 15% overnight profit. They want an overnight 500% to make it worth their while. Accordingly, option trades are one of the first things the exchanges (and the SEC) look at when there's a sudden move in a company's stock. It's like waving a red flag that says "Investigate me!"

I'd hate to have to explain how I got so darned lucky all of a sudden. Good luck to whoever placed these trades. You'll need it when they knock on your door.

Comments (0) + TrackBacks (0) | Category: Business and Markets



Email this entry to:

Your email address:

Message (optional):

The Last Post
The GSK Layoffs Continue, By Proxy
The Move is Nigh
Another Alzheimer's IPO
Cutbacks at C&E News
Sanofi Pays to Get Back Into Oncology
An Irresponsible Statement About Curing Cancer
Oliver Sacks on Turning Back to Chemistry