AVNR - Examining the PDUFA Bio-tech Trading Results

Discussion in 'Options' started by livevol_ophir, Nov 1, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    AVNR is trading $5.10, up 110.7% with IV30™ down 75.2% on the FDA drug approval. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/avnr.html">in the article</a>.

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    On Friday, with AVNR trading $2.81, I wrote this: <b><a href="http://livevol.blogspot.com/2010/10/avnr.html">
    Avanir Pharma (AVNR) - Analyzing a PDUFA Date &amp; Trades</a></b>

    The Options Tab on Friday is included (<a href="http://livevol.blogspot.com/2010/11/avnr.html">in the article</a>).

    For convenience I have included a snippet from the last blog here:
    "Generally in bio-techs one rule of thumb is that the meat (ATM) is too cheap and the wings are too expensive. Conveniently there are Nov 0.5 puts to use.

    If you want to gamble (and that's what this is, a gamble), you can find some premium to play with by selling the Nov 0.5/1 put spread @ $0.10 (or better b/c there is liquidity in the 1 line). That max loss is just $0.40 and hypothetically there is ~ 20% chance that gets realized. Selling the spread @ $0.15 yields a max loss of just $0.35.

    You can use that $0.15 of premium, sell some OTM call, and then use that to buy an option. Of course, this assumes you want to gamble on good news. A gamble on "not-good news" is pretty easy. You could just pay $0.05 in the Nov 0.5 puts, or go ahead and do the Nov 1 puts."

    The Nov 3 straddle was priced fair value ~$2.40 and we can see the stock has moved $2.68 at time of this writing, so pretty good options market pricing. The general rule is to buy the meat and sell the wings in bio-techs but to be 1:1 long:short contracts. In this case a front month straddle purchase with any strangle sale would have been a nice winner.

    For those that gambled on this one, I hope you won... Please keep in mind, the "general" rule does NOT win this easily all the time. You can get housed being long premium in a PDUFA stock, don't use this as the apotheosis, just as one example of many.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/avnr.html">http://livevol.blogspot.com/2010/11/avnr.html</a>

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