I am very inexperienced with options trading. I am long DNDN at 15.25 and would like to hold into the FDA decison, however I want to hedge my position with a put option. Does anyone have any advice as to which particular contracts would be best to hedge myself with? Also, I was thinking that maybe I should dump my shares and buy a straddle instead. What are your thoughts on this strategy? Thank you in advance...
Two ways: 1) Buy outright call at 17.5+ (you are looking for a big move), don't trade the stock. Or two: Sell the Jan08 15 straddles for 14.00. Yes 14.00 premium. Buy 2x May07 17.5 calls for 3.70. That way you make out on a nice big upside move, and if it collapses to 0 , your worst downside risk is 3.70x2 + 1.00. Not collapsing to 0, though. More likely, the stock ends up at 5-8 or 25-30 and IV definitely collapses. Selling the straddles makes out nice on the IV collapse. So likely if it sells to 5, those straddles you sold for 14.00 end up worth 9.00 and the calls worthless. Upside is much better. And no move you make out well too.