I will not disagree nor agree for we are dealing
in to many hypothesis without facts to form an
accurate conclusion. The shorts and options
traders may simply be taking advantage of Enzo
being a targeted stock. Professional shorts
possibly have a more realistic expectation as to
historical time frames for drug development,
etc. (science is slow) and have better models for
determining fair market value - they could simply
be taking advantage of over enthusiasm in
Enzo's science - hedge funds have certainly
increased in number with regards to ownership
in Enzo - and as tightly as Enzo is traded they
don't have to dump many shares to affect the
option and stock prices.
I think a hedge fund formula is very simple and
straight forward - we locate a thinly traded
science stock - wait for an announcement of
phase I and enter a position at the 200 day
moving average - when it goes above it they
short it - knowing full well that they can play this
game until at least the announcement of phase
III - in between they have lots of meaningless
announcements to take advantage of what is a
three to five year process that 80% of
companies fail (never get to phase III or completion)
What better odds can you get?
Many studies have suggested that short selling
helps to establish price equilibrium. With
options the actions of option buyers and sellers
can drive the price to its optimal level more
quickly. It is theoretically more likely, therefore,
that the option price will reflect fair value.
PRICING AN OPTION DETERMINING "FAIR VALUE"
Just like a share price, an option’s price is
determined by market forces. But there are more
factors which affect the option price than affect
the underlying stock market. With the
underlying stock, the market view is dictated
by sentiment, fundamentals and technical
factors. With options and warrants, all those
are relevant, but there is more besides.
The option premium is determined by five factors:
The underlying stock price is normally the most
significant factor affecting the price of an
option. All the elements affecting the price
of a stock quite clearly affect the price of the
option as well.
As mentioned earlier, in-the-money options enable
holders to buy or sell the underlying
shares at a better price than the prevailing
market price. They therefore cost more than the
equivalent at-the-money and out-of-the-money
options because there is more value
embedded in them. And whether an option is in-the-money
depends solely on the underlying
price because the strike price is fixed.
The difference between the strike price of an
in-the-money option and the market price of the
underlying stock is called the intrinsic value.
For example, a call option with a strike price of
$45 when the underlying market price is $50
has an intrinsic value of $5. However, it is likely
that the option in this case will trade for
more than $5. Even out-of-the-money and
at-the-money options, which have no intrinsic
value, will probably have some value. This is
because there are other factors giving value
to the option. These are called "extrinsic" factors
(or "time value" factors). The extrinsic factors
are time until expiration, dividend expectation,
interest rate and volatility.
2. Time Until Expiration
All other things being equal, the value of an
option will diminish as the option approaches
expiry, and the rate at which it diminishes
will be faster the closer it gets to expiry so that
close-to-expiry, out-of-the-money options can
lose their value very quickly. It is for this reason
that an option is often referred to as a "wasting
asset" and that an option is said to suffer
"time decay" -- the decline in time value.
3. Dividend Expectation n/a
4. Interest Rate n/a
5. Volatility
At any time, the above four factors -- underlying
price, time to expiration, dividends and
interest rate -- are all either known objectively
or can generally be estimated with reasonable
accuracy.
Nevertheless, two options series for which all
these factors are the same can, and generally
will, trade at different -- sometimes significantly
different -- premiums. Why should this be?
The answer lies in the concept of "risk". If
one option series trades at a different premium
from another, it is likely that the more expensive
one represents more risk to an option writer
than the other. The degree of risk is the probability
that the price of the underlying stock will
move, within the life of the option, from its
present value to a point where the option writer
incurs losses. The greater the probability that
this will happen, the greater the risk and hence
the higher the option price. By the same token,
the option buyer will pay a higher price for the
bigger probability that the underlying stock
will move in the buyer’s favour.
The degree of expected fluctuation in the underlying
stock price determines the extent of the
risk. The measure of this fluctuation is most
commonly referred to as "volatility". Implicit in
any option price are assumptions about the likely
volatility of the stock. For this reason, one
generally speaks of the "implied volatility"
of the option, i.e. the likely volatility of the
underlying stock is "implied" by the option
price.
Expressed as a percentage, implied volatility
is closely monitored by option market users as
a vital indicator. Indeed, professional options
traders are more likely to discuss option prices
in terms of implied volatility than in terms
of dollars and cents.
Volatility, therefore, is the "mystery" factor
which determines the options value, after taking
all the known factors into account. It reflects
the market’s view of how unstable the price of
the underlying asset will be. The more unstable
the asset, the higher the premium that
should be paid to secure an option over that
asset i.e. the higher the implied volatility.