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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: derekb.lowe@gmail.com Twitter: Dereklowe

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July 10, 2013

Good Fortune Smiles On Someone's Onyx Option Trades

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Posted by Derek

This will be interesting to follow: the recent offer by Amgen for Onyx Pharmaceuticals (which happened while I was traveling, and didn't get a chance to write about) has had a financial sidelight: someone got very, very lucky with some nearly-expired call options.

On Thursday and Friday, traders enacted a few small-sized trades on Onyx call options - which give the buyer the right to buy the stock at a given price by a certain date - hoping to catch a share price rally by mid-July.

Onyx averaged 715 calls per day over the past 22 trading days, according to options analytics firm Trade Alert.

Call volume was notable on Friday, when a total of 1,561 calls changed hands, more than double the normal level, against 488 puts. On Thursday, traders exchanged 1,374 calls and 664 puts on Onyx, data from Trade Alert showed.

"This flow looks a bit suspect to me. It's possible the buyers knew of the deal and put that knowledge to work," said Trade Alert President Henry Schwartz. "The odds of turning a few hundred thousand dollars into millions overnight are very small, yet that's exactly what happened in Onyx options last week."

Specifically, some of these were July call options, worth a dollar or two on the Friday before the announcement, which started off Monday at about $30. That's just the sort of thing that speculative options traders dream about, and it's also just the sort of trade that the SEC likes to investigate. I wish good luck to whoever it is that has to explain this activity; they're going to need it in order to persuade anyone that good luck was all that was involved.

Comments (8) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. Hap on July 10, 2013 11:13 AM writes...

The only people whose good fortune is certain from this are the lawyers of the people who bought the options.

I'm not guessing so, but I wonder if the ratio of calls to puts looked the same on the high-volume days as the low-volume ones.

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2. ptm on July 10, 2013 11:15 AM writes...

The onus is on sec to prove wrongdoing. Judging by the earlier volume at least a portion of those trades were probably legitimate.

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3. darwinsdog on July 10, 2013 11:20 AM writes...

Onyx is a classic example of cut-throat-ary aimed at it's scientific staff. The deal is they laid off all the scientific staff in the 1990's after partnering the Raf Kinase series which became Nexavar, to Bayer. Onyx existed for many years as a shell company with only a few exec.'s and no research labs before hiring scientists again once the money from Nexavar started coming in. Maybe from the trading activity some of the laid-off former staff managed to retain some of their penny-options over the years but overall ISO's in the hands of cut-throat executives are a 1%-er hustle.

"Hustle you say, do you mean grift sir?", "why yes I do and here’s the hustle" (play Joplin ragtime in your head to accompany this: firstly, incentivize people to join a start-up with rich ISOs, have them develop something of value, partner it for development and then lay off your scientific staff (all of them) so it is just you and your Exec pals remaining in a shell company and get most of your laid-off scientist options back then re-issue these as bonuses to yourselves for managing assets so well. Direct your board to approve commemorative artwork of yourself (optional but popular) then retire or just do it again to a whole new generation of scientists. The grift is if a scientist(s) were to stay as an employee (not get laid-off) they can keep options forever but once you are no longer an employee you generally have to execute options within a very short period or relinquish them – sure you can buy and hold after an IPO but young poor scientists don’t generally have that kind of resource especially when they have just been laid-off.

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4. Hap on July 10, 2013 11:31 AM writes...

Yeah, but if your dad is an Onyx director and you mysteriously buy a bunch of nearly-expired options, how much proving do you think a jury is going to need? Profit is only good if your lawyers don't spend it.

The difference between normal/recent call:put and the 2:1 ratio seen on those days limits the illegal part of the traffic further probably - if normal ratios are close to 1:1, then maybe only 300 or 400 options were involved (although that would still be 20% of the options, which seems like a big chunk to me), and if the recent ratios were higher than 1:1 call:put over purchase rumors, then the numbers of questionable trades might be smaller.

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5. bbooooooya on July 10, 2013 1:13 PM writes...

Option trading is zero sum, so the only people who got screwed were those out looking to screw someone else. If I recall, rumors about this started leaking out on the Friday before after hours trading closed.

I'm sure buyers of the $1 calls will point out that option volume doesn't follow a normal distribution.

Seems pretty brazen to me, but maybe making a million bucks overnight is worth getting that call from the SEC?

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6. researchfella on July 10, 2013 9:19 PM writes...

@darwinsdog:
First, there's nothing particularly nasty or unusual about R&D scientists in a biotech company getting laid off when they have a promising compound entering the clinic. That's the unfortunate situation when the company needs to fund the expensive clinical studies and can no longer afford to conduct discovery research. I don't know if there was anything unusual or cut-throat about how it proceded at Onyx, but it's a rather common progression in the life of a biotech company.

And second, please don't over-estimate the value of what the Onyx scientists did in the discovery of Nexavar (sorafenib). Read the various journal publications on the Bayer-Onyx sorafenib story, and check out who the inventors are on the sorafenib patent: all Bayer scientists. Onyx did a great job at press releases over the years, Bayer did a miserable job at press releases, and the popular misconception is that Bayer licensed sorafenib from Onyx. Not so.
Oh, by the way, Bayer laid off essentially all the Bayer scientists who discovered and developed sorafenib and shut down their research facility in Connecticut about a year after sorafenib was approved for renal carcinoma.

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7. Hap on July 10, 2013 10:19 PM writes...

There's probably nothing particularly cutthroat about it - that's the problem. Researchers get tired of paying the same costs for success as for failure. They do not become less bitter (nor should they) when the equity they assume as a replacement for pay (thus assuming significant amounts of risk for the prospect of their success) and which they helped to make worth something turns out to be worth nothing for them but a lot for others who perhaps had less to do with what was found.

People get ornery when they spent the better part of doing useful things only to find out that their reward is to be the rube in a game of three card monte. That's probably why we need so many people to come and do research for us.

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8. prabu on March 28, 2014 5:21 AM writes...

First and foremost, there's nothing especially terrible or unexpected about R&d researchers in a biotech organization getting laid off when they have a guaranteeing compound entering the center. That is the heartbreaking circumstance when the organization needs to store the costly clinical studies and can no more bear to direct disclosure research.

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