I came across this question in my options textbook but it has no explanation and I was curious if anyone could explain it or point me in the right direction. It’s quite complex and I’m not sure how to approach it.
For the below event, I would like you to come up with a probability distribution for your estimate of when the event may occur (and the stock to realize a large move). When doing the distribution, you should think about timing in terms of monthly option expiries (each monthly option expires on the 3rd Friday of the month, so March 2022 expiry ended on Friday 18th March, then April expiry ran until Friday 15th April, and so on). As an example of a very simple distribution, the earnings date for a stock may not be confirmed a few weeks out from earnings and I may give the below distribution for where I think the earnings day move will be realized:
So the trader would run 35% of the earnings event (whose size we would also estimate) in April expiry and 65% in May.
The event I want you to look at is a Phase III data readout for a critical pipeline drug for fictional company BiotechA. The company are conducting their Phase III study on 400 patients, starting in early 2021. It is January 2022 and you have collected the below information in preparing your timing estimate for this data readout:
• February 2021: A slide in a management presentation says the trial has completed enrolment of patients for the study and results are expected in “late 2021”.
• May 2021: On the Q1 conference call, when asked by an analyst in the Q&A session, management say they expect results in “early 2022” and say there has been “a minor delay as regulators initiated an extra review of our trial design. They have emphasised that safety data for this drug will be watched very closely. We are not concerned as this is routine.”
• September 2021: At an investor day, the Chief Medical Officer of BiotechA says that they “expect results in Q1” and discloses “a very minor issue with the regulator after two patients fell ill, but this is nothing to be concerned about in our view”.
• November 2021: Their Q3 earnings report states, “Results from our Phase III trial are expected in mid-Q2. The study is ending in the third week of January and our data collection and analysis period is expected to take around three months.”
Please create a probability distribution for your timing estimate, in a similar fashion to the above example, using multiple expiries