NLNK Stock – Investor Question On Put Premium Valuations

Often option premiums are baffling. One day a stock can hardly move but the option premiums can seem too high or too low and another day the stock can make a big move and yet the option premiums do not seem to reflect the change. That’s the question this investor has about NewLink Genetics Corp Stock which trades on the NASDAQ under the symbol NLNK. Let’s review their question. My adjustments or additions are in brackets.

Investor Question on NLNK Stock Option Premiums

“I wonder if you can cast some light on the following.   (On March 3) days ago someone mentioned NLNK (stock) and after looking at the stats (on the stock)  I sold a couple of Put (option) contracts at $30 for 22 Mar expiration. The premium (earned was) $2.60 and the stock price was $40.18.   After 2 days I got nervous when the stock dropped over a dollar and BTC at $1.80 (March 7) the stock dropped over $5.00 (down to close at $31.60) and the put (closed at) $1.30.   Is this a function of the volatility? Appreciate your answer.”

My Answer

The first thing I have to say is that NLNK is not for the inexperienced investor. Personally I don’t think it’s for any investor but then I tend to stay clear of this type of stock. Based on volume and price there is no real support in the stock which is why it collapsed so easily, down more than 60% in two months.  Even on Friday though due to the stock price the company has a market value of $611 million. But revenue is $1.1 million dollars. Earnings are negative $1.24 and cash flow is negative $1.20. Even with a decline of 60% the company is still trading at 559 times price to sales. This type of stock literally sucks investors in.

NLNK Stock Apr 25 2014

FireEye Stock (FEYE)

Kind of reminds me of another stock FireEye Stock. It was mentioned this evening on CNBC including how a seasoned investor Brian Kelly of Brian Kelly Capital actually kept averaging down as the stock plunged until finally took the losses and got out. He explained that he sold some covered calls on the way down to try to ease some of the losses.  FireEye has a market cap of $6.4 billion because of the stock price but revenue of just 161.6 million, earnings of negative $5.58 per share and cash flow of negative $2.21 per share.  So even pros get caught in these disasters.

FireEye stock Apr 25 2014NLNK Stock – Stay Clear

In your case you sold for $2.60 and bought to close for $1.80 so you made money and thank goodness for that! These are the types of stocks I continually warn about. There is no earnings here of any kind. These are the types of stocks to run away from. There is nothing of quality here despite being pushed by analysts and bloggers alike. In my opinion, you need endless pockets of cash to trade in these types stocks.

Put premium volatility is part of the reason for the differences you saw in the put premiums. But there are other issues as well including some manipulation. The market maker sees all sides of trades. They know the demand for options and what is also happening in the company. For NLNK Stock, the days leading up to March 7 options were expensive, both puts and calls as the company was preparing to announce an update on its IMPRESS phase 3 pancreatic cancer trial results.

These types of events are just like earnings announcements for many companies and for speculative companies like NewLink Genetics Corp, they are even more important. This type of announcement could send the stock soaring or plunging. Indeed on March 7 you saw the stock plunge on the news that the trial was being extended. That’s “pharmacy talk” for no good results yet. The stock plunged on the news but the market maker also knows that with the news out, the volatility will decline and the option is adjusted for the decline in volatility but also the news announcement being finished.

Market makers know how many options are outstanding and all the prices sold at. They know what their bottom line is at all times and market makers make money. End of story. They are experts at what they do. These types of stocks are easy to manipulate. You can see in the chart below that on March 7 with the plunge the volume was the highest it had been in weeks. Investors were dumping shares. Yet as you found the option prices did not “reflect” the huge drop in the stock. The market maker will not let this trade work against them. They know how to manipulate stocks. The stock rallied back up from the sell-off and then leading into expiration on March 21 look at the volume again. This is, in my opinion, an attempt to shakeout option holders on expiration day. The stock on March 21 traded from $29.60 to $27.74 and closed at $29.18. The market maker knows where the most money for them will be in this trade, and  they can easily move a spec stock like NLNK and shake out the weaker hands. Interesting how the following trading day after options expiration the volume was back to average and the stock closed at $30.16.

In my opinion, this type of stock does not work well with the Greeks analytics. They have their place and I know a lot of investors swear by them. But the Greeks for analytic purposes are of little value in a speculative stock like the two mentioned here. On March 3 they showed there was little chance the stock would fall to $30.00 but that’s because analytics are based on the past to try to predict the future. Speculative stock prices move so much that it is difficult for any technical tool to be of consistent predictive value.

NLNK Stock Mar 7 2014

NLNK Stock Summary

So there you have it. In my opinion a lot of what you saw in what seemed strange put option premium pricing, was the days leading up to the announcement and then the market makers adjusting for the news being released. In my opinion stocks are often manipulated even though for some reason it does not seem to be a problem for the SEC. Perhaps that is because stock manipulation is hard to prove with any degree of certainty, just as in this article it is an opinion only, but it certainly does look suspicious on March 21 doesn’t it.

This is one of the reasons I stay with my big cap stocks that have high volume and are more difficult to manipulate and definitely more expensive. Yet couldn’t the Apple Stock 7:1 stock split be considered by some investors as a possible attempt to manipulate the stock price? Especially after the CEO complained that the stock was undervalued.

Thanks for your question.

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