Novavax Stock Is Red Hot but the Smart Money Is Slamming on the Brakes

One of the remarkable turnaround stories during the COVID-19 pandemic, biotechnology specialist Novavax (NVAX) has struggled to maintain viability since its glory days. However, NVAX stock happens to be on a roll this year, thanks to key licensing agreements and most recently an unexpectedly positive first-quarter earnings report.

Late last week, Novavax posted a loss of 6 cents per share, which was a far superior result than the expected loss of 25 cents. Further, revenue for the period clocked in at $139.5 million, demolishing the consensus view of $69.5 million. Without getting too carried away, the sales tally represented a 79% loss against the year-ago quarter. However, investors were more than pleased with the surprising turn of events.

On Friday, NVAX stock closed up 9.53%, while in the past five sessions, Novavax shares had gained nearly 25%. With that, the Barchart Technical Opinion indicator rates NVAX as a 72% Strong Buy, with current signals suggesting a strengthening of its short-term outlook. Still, for many other investors, the biotech specialist might raise serious skepticism.

Even with the recent euphoria — which has contributed to a 52-week performance of over 59% — NVAX stock remains down more than 92% over the past five years. Of course, that includes the COVID peak, which isn’t the fairest of comparisons. Nevertheless, the garish red ink demonstrates just how far Novavax is from reaching its prior valuation.

On the other hand, because NVAX stock is a “cheap” security and because it appears to be the target of a short squeeze, hardened speculators may be incentivized to take a shot on the popular biotech name. However, if we’re looking at the data carefully, Novavax may be riskier than it’s worth (at this hour).

Heavy Call Volume is Only Part of the Story for NVAX Stock

According to Barchart’s Options Time & Sales screener, for the May 8 session, volume for call options stood at 7,469 contracts, while volume for put options only came in at 631 contracts. Based on this extreme variance, combined with the stratospheric rally of NVAX stock, there’s a temptation to consider jumping on the bandwagon. However, caution should be the guiding light here.

Data from Fintel shows that the latest short interest of Novavax stock is 32.76% of the float, while the short interest ratio sits at a decently elevated 5.55 days to cover. While these metrics suggest that aggressive shorts may be getting their positions blown up, it’s quite possible that a bulk of the prior spike in call volume represents risk mitigation.

Yes, that might sound like great news for speculative bulls. Indeed, premarket trading currently shows a 4% boost in NVAX stock. However, the smart money doesn’t appear to be taking the bait.

Another Barchart indicator — the volatility skew (for the June 18 expiration date) — tells a much different tale than what the put-to-call ratio is implying. Here, implied volatility (IV) is practically flat across the strike price spectrum from the current spot price to the northernmost end of the axis. Basically, there’s no sense of pricing for upside convexity beyond normal baseline behavior.

In sharp contrast, the skew is very much biased toward downside protection. As you can tell from the chart, both call and especially put IV zooms higher toward the southernmost end of the strike price axis. Further, the latter reading peaks at an incredible 989.39% volatility rating. From the evidence at hand, the smart money is paying a disproportionately high premium in volatility units to protect itself from catastrophic losses.

Of course, there’s no absolute case that can be made in a non-deterministic system like the equities market. But given the severe spike in short interest, it’s awfully conspicuous that sophisticated market participants don’t appear to want any part in potential upside exposure.

It’s a Lottery Ticket

Probably the best way that I can explain Novavax stock is that it’s a lottery ticket at this juncture. From a purely nominal perspective and outside other context, NVAX is cheap — and better yet, it’s popular, enjoying a cult following. So, I wouldn’t be against throwing some pocket change at the security and seeing where it can go, just for the heck of it.

But as a pound-the-table type of long-term investment? That’s where I have to let the rational side of my brain do the heavy lifting. If the skew is any indication, the professional traders view a meltdown as a far likelier outcome than a sustained reversal in NVAX stock.