ARNA - Bio-tech Vol Yields Trades

Discussion in 'Options' started by livevol_ophir, Jul 29, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ARNA is trading $6.45 with IV30&#8482 up 3.5%.

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    Thanks to Frank Fahey for getting this stock on my radar.

    This is a high risk pharma/bio-tech with a decision due out in Sep from what the options seem to indicate. Aug IV is 93 while Sep IV is 220.

    The Options Tab (<a href="">in the article</a>) illustrates a nice trade, though it is several legs so don't let commissions eat this one up.

    <b>Trade Stats</b>
    Sep 2 puts: Buy 1 for $0.30
    Sep 4 puts: Sell 2 @0.95
    Sep 7 puts: Buy 1 for $1.30
    Sep 5 calls: Buy 1 for $2.80
    Sep 8 calls: Sell 2 @ $1.35
    Sep 9 calls: Buy 1 for $0.95

    Why would anyone do this ridiculous trade? Check out the PnL Chart (<a href="">in the article</a>):

    Max Gain: $125.00
    Max Loss: $75.00
    The trade makes money if ARNA stays above $2.75 at Sep. expiration. Note that the Sep 12.5 calls are $0.20 bid; which is wild (but not necessarily a mistake).

    Note that the dip on the upside PnL is between $5 and $7. This is done on purpose. It would reflect a belief that ARNA will be moving away from its current price ($6.50).

    Also note that it is entirely possible that ARNA goes below the $2.75 level. I can't say I love this trade, but I thought some of you might enjoy it. If you're more risk hungry, you can sell some Aug and hope the announcement doesn't come out then - that will fund this Sep trade and turn it into an arb (after Aug). Risky though... ha ha.

    Some alternatives to this kooky trade involve buying the meat (ATM) and selling the wings. Whatever you do, please do not be net short contracts; no naked sales on bio-techs allowed!

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here: