It’s not too often that a business transition makes a gargantuan shift in fortunes but that appears to be the case for biotechnology specialist Novavax (NASDAQ: NVAX). Previously one of the star entities in the race to develop a COVID-19 vaccine, NVAX stock once commanded a share price in the triple digits. But from the peaks of 2021, the security suffered an ignominious decline, reverting to penny-stock valuations.
Table of Contents
However, circumstances are starting to turn favorably. Since the beginning of this year, NVAX stock has gained over 47%. It’s now on the cusp of clearing the psychologically and technically significant $10 level. Further, fundamental changes have made Novavax much more attractive to serious investors.
Perhaps most significantly, the biotech specialist is pivoting from a single-product vaccine seller to a technology licensing model centered on the company’s Matrix-M adjuvant. In January of this year, Novavax signed a licensing deal with Pfizer (NYSE: PFE), receiving $30 million upfront and potential milestone payments of up to $500 million plus royalties for vaccines using Matrix-M. Significantly, this structure enables Matrix-M to become a platform technology across multiple vaccines without Novavax having to fund full development.
Just as well, financial momentum has been solid for NVAX stock. Recently, Novavax posted its fourth-quarter results, with earnings per share of 11 cents, beating the consensus target of a loss of 56 cents. Also, revenue of $147.14 million greatly exceeded the target of $85.52 million.
Yes, the market is pricing in this good news. However, the smart money remains skeptical — and that’s part of the reason why NVAX stock could be an intriguing deal for hardened speculators.
Volatility Skew Reveals Pensive Attitude Toward NVAX Stock
One of the main reasons why professional traders gravitate toward the options market is flexibility. By structuring derivative contracts rather than buying or selling the security outright in the open market, sophisticated players can modulate their exposure without causing a major stir. However, the footprints of these transactions are still reflected in the data, which is where the volatility skew comes in.
Definitionally, the skew identifies implied volatility (IV) — or a stock’s potential range of motion — across the strike price spectrum of a given options chain. In other words, this screener shows the surface-area distortion of volatility space, allowing retail traders to understand how the smart money is managing its risk profile.
If we frame the skew (especially for put IV) as a security parameter, spikes in the dataset represent areas of vulnerability. Stated differently, the jump in IV indicates that traders are willing to pay an extra premium for protection.
In the case of NVAX stock, for the April 17 expiration date, the skew is relatively flat across the strike price boundaries except toward the left-hand side (that is, toward the lowest strikes). That’s where put IV rises higher to nearly 1,000% IV. On the other end of the spectrum, the skew never breaches 150%, indicating relatively no urgency for upside convexity.
All told, smart money traders are more worried about not losing than they are in directly winning. Theoretically, this setup would make call options cheap on a volatility basis. If there was a legitimate reason to buy NVAX stock, it could be considered a discount.
Using the Inductive Approach to Trade Novavax Stock
Here’s the bottom-line truth that is unavoidable. Every single forecast about the unknown future is necessarily inductive. For example, a head-and-shoulders pattern does not logically compel the affected security to eventually fall down; it’s just an observed pattern or trend rather than a law of the market.
However, not all forms of induction are epistemologically sound. Personally, I prefer enumerative induction of market structure. Colloquially, there’s a big difference in the emotional response to a security that is on a record-breaking rally versus one that’s suffering from a catastrophic implosion. In the former case, traders may be concerned about holding the bag. In the latter, the anxiety may be centered on the threat of falling knives.
At the same time, I would also argue that not all stocks respond the same way to the same circumstances. In other words, I think it would be a mistake to assume that a head-and-shoulders pattern represents a bad harbinger for all securities. In my view, every tradable asset is unique — and each unique entity almost certainly features distributional behaviors that must be calculated individually.
That’s why I don’t rely on Black-Scholes, which imposes a predefined formula to make forward pricing estimates. Instead, each stock has its own unique formula — and that’s what needs to be calculated in order to gain a better understanding of projected market behaviors.
Identifying a Specific Trading Idea
Going back to Novavax stock, the security is currently in high-octane mode. Over the past 10 weeks, NVAX printed eight up weeks, leading to an overall upward slope. There’s nothing special about this 8-2-U sequence, per se. However, this quantitative signal is a distinct marker — and we may expect that NVAX stock will respond differently to it than if any other signal had materialized.
Using a custom Python, we can conduct a combination of enumerative induction and Bayesian-inspired inference, noting that under prior flashes of the 8-2-U signal, NVAX stock would be expected to range between $5 and $20 over the next 10 weeks. While that’s a massive range, most of the signal’s probabilistic mass would be expected to land north of the spot price.
Going by the data, I’m tempted by the idea of buying the $11 call expiring April 17 outright. Pairing this option in a bull spread doesn’t make much sense because you’re not getting much for selling out-the-money calls. Further, NVAX stock has exhibited strength-begetting-strength under 8-2-U conditions.
To be fair, the future is not compelled by the past, so we have to approach speculative names like Novavax with caution. Still, if you’re willing to play with some loose change, this biotech specialist could be intriguing.
Leave a Reply