VIVUS: Bio-tech Event Approaching - Downside Risk Over Upside Potential?

First, the stock portion.

1. On 12-22-2011 the stock dropped 16.5%. Here's a news snippet:

Vivus Inc. saw its shares plunge 15 percent on Thursday after bad news about an ingredient in its Qnexa obesity drug, now under review by U.S. regulators.

Mountain View-based Vivus (NASDAQ: VVUS) tested topiramate, an ingredient in Qnexa, and found that babies born from moms taking the drug had a higher rate of cleft lip and cleft palate.

Source: San Francisco Business Times via Yahoo! Finance -- Vivus takes a heavy hit on obesity drug danger study, written by Steven E.F. Brown.

2. On 1-9-2012 the stock popped 14.7%. Here's a news snippet for that one:

Shares of Vivus Inc. rose Monday after the drug developer said the Food and Drug Administration would allow its weight-loss treatment Qnexa to be marketed to women of child-bearing age, a broader potential market, if the drug receives regulatory approval.

THE SPARK: The Mountain View, Calif., company said the FDA asked Vivus to remove a "contraindication" for women of child-bearing potential in the drug's proposed label. Contraindications state that the drug should not be used because the risk clearly outweighs any possible therapeutic benefit.

The company said a contraindication will remain for pregnant women, and its announcement should not be interpreted to mean that the potential for FDA approval has improved.

Source: AP via Yahoo! Finance -- Vivus shares climb after Qnexa FDA update.

It's so odd how the FDA 'n stuff 'n stuff work. I mean, how can that not be interpreted as a better chance of approval? But, alas, I don't think the company was just doin' some cya, I think it's actually true.

Now, the vol portion.. Just awesome. The implied has risen from 61.21% on 12-22-2011 to now 162.27%. That's a 165% increase in six weeks. And "why", you may ask... Here you go:

VIVUS [] mentioned earlier that an advisory committee of the Division of Metabolism and Endocrinology Products (DMEP) will meet to discuss the Qnexa NDA during 1Q 2012. The Endocrinologic and Metabolic Drugs Advisory Committee is scheduled to meet on February 22 and March 28-29

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Source: BioPharmCatalyst Upcoming Adcom meetings for CHTP & VVUS.

Though not pictured in the six month chart, VVUS stock has moved as much as 56.5% in a day (down). That occurred on 7-16-2010 when the FDA rejected Qnexa.

Let's turn to the Skew Tab.

Here's where a simple graph reveals essentially everything. Whether or not you were a news reader, it's obvious that there is "something" happening in the Mar expiry that isn't in the rest. The Mar vol is so elevated to the other two months pictured that even the crazy downside sticky skew in Feb is below the downside in Mar.

Let's turn to the Options tab, below.

We can see Feb, Mar and Jun are priced to 103.40%, 178.225 and 128.41%, respectively. The 52 wk range in IV30™ for VVUS is [43.33%, 157.35%], so the level today is an annual high. Given that Mar vol is already priced to 178%, the annual high today is nothing more than a stepping stone to much higher levels, unless there's a delay or a surprise revelation soon.

Peaking at the individual prices, just for fun, we can see the Mar 6 puts are priced to 214% (ish) vol, or worth more than $0.50. I didn't include it here, but even the Mar 4 puts are bid, with a $0.12 x $0.18 market, yielding 221%.

It is very interesting that the upside (see skew) is priced so much cheaper (in terms of vol) than the downside. Sill, there is a nickel bid for 313 in the Mar 24 calls. The option market does reflect substantially less upside potential than downside risk per the vols by strike in Mar. I find that a little weird, but then again, the stock may be at a level that already has a bit of an approval already priced in... Or not...

This is trade analysis, not a recommendation.