Just about every news outlet has a headline featuring Gilead Sciences, Inc. (GILD) this morning. That’s the definition of a stock that is trending in the news. The reason for the hype is clear. GILD is a pharmaceutical company that just had a successful drug trial that prevented HIV in 100% of the 2,000+ trial participants.

What has the stock been doing since the news broke? Yesterday, the shares shot up $5.34. This morning in pre-open trading they’re up another $2. You can see in the chart below that the 1-month implied volatility spiked as well.  On the next page you will see how short-term GILD options have behaved in the past.

In this chart you are looking at the implied volatility of the at-the-money options expiring in the short-term. The red dots indicate periods where the spike in volatility expectations is due to an earnings announcement. There are a few spikes in between earnings reports and those spikes are typically related to big down moves in GILD share prices. On the far right of this chart you can see the short-term volatility expectations are spiking above 25% between earnings announcements. However, this time the spike is occurring as the stock is moving higher.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of GILD’s stock price over the past year. You can see that the actual behavior (the blue histogram) did not make big moves as often as the modeled options prices expect. This graph tells us the GILD options expiring on June 28th are relatively expensive. The tool tip shows a point where the modeled options prices overestimate the frequency of a big down move.

GILD is trending in the news after the company published the success of a drug that prevents HIV. This announcement is causing GILD share prices and short-term volatility expectations to spike. This sets up a situation where we can sell expensive options in a high-probability trade.

Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade idea using GILD options today.

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback