How To Play Pozn- Fda Annoucement Aug. 1

Discussion in 'Options' started by dstod, Jul 16, 2007.

  1. dstod


    Hello all,

    I have very limited experience with options, however I want to play the FDA announcement on POZN that is expected on August 1st. The stock has a low float, so I expect it to make a huge move either way when the announcement is made.

    I want to buy both the Aug $25 calls and the Aug $10 puts simultaneously in order to profit from the volatility.

    Does this make any sense or is there a better trade that I can put on?

    I appreciate your feedback in advance...

    Thank you
  2. Hi,

    How sure is the FDA announcement in Aug. 1st?
    It happens quite often that the FDA-News will be delayed.
  3. I'm sure sharper minds than mine will step in but you really don't want to "buy" the strangle now as Aug IV is 162 (avg) vs Sep 127...simply means that the options are very high priced and after the FDA announcement they will most likely drop and you will lose.

    If you think between now and Aug 1 the IV will go higher THEN buying the strangle makes since.

    In might be a good RC play but check with IV_trader:)
  4. Look at it this way...if you sold the 20 or 17.5 straddle you will get $7. I don't know the stock but will the announcement send the stock more than 7 pts either direction? You could win on this bet two announcement or they postpone the announcement so the IV drops or the announcment doesn't move the stock that much AND IV drops.
  5. Are they awaiting FDA approval on a major drug?

    These pharma/biotech stocks with pending announcements are about as wild a volatility ride as you'll ever see. I used to follow a few. Is the company depending on this one product for its profitability for the next 10 years? I've seen some drop by 90% or jump by 400% in the course of a couple of days after an FDA announcement.

    Are you emotionally ready for that?
  6. That's what they're currently listed in the news but as you noted, dates often change.

    I doubt that Texima is going to be a blockbuster drug since it's merely a combination of Imitrex (Glaxo's migraine medicine) and Naprozen (Aleve) which is OTC. Imitrex loses patent protection within 2 years and at that time, one could take generic Imitrex with OTC Aleve. But what do I know about market mania and POZN?

    These FDA decisions are what some here call binary events. My take on that is that the options will usually go to 0 or 1 upon the news (delta). These are usually all or nothing directional plays and you either make a killing or you're the carcass. The safe play is to ride the wave the day of the announcement (if there is one). Trade the stock.
  7. Spin is correct. It's really tough to call these biotech events. Over a year ago, I put on a Pozen play, shorting the stock and overselling OTM puts. I felt I had a "feel" for the upside risk (the reason for not purchasing the inflated puts).

    What happened? The stock dropped enough to make my short position more profitable than the slight loss on the puts. Pizza money for the month! In retrospect, I feel that I was a little lucky, and would not put on such a play without much more due diligence. Be careful!

  8. dstod


    I appreciate all of the feedback. I understand the risks involved some more and if I play this, it will be a very small position. I will definitely keep a close eye on this.

    Upon further research, the decision will by made BY Aug. 1st.

    Here is an interesting article I found on

    Pozen (Nasdaq: POZN) is awaiting an FDA decision on its New Drug Application for Trexima as a treatment for migraine headaches. In June 2006, the company received an approvable letter from the FDA requesting more data, specifically on the interaction between Trexima's component drugs, naproxen and sumitriptan. The FDA is set to rule on this resubmission by Aug. 1.

    The two drugs treat migraines in different ways. Sumatriptan stimulates serotonin receptors, constricting blood vessels to provide migraine relief, while naproxen is a non-steroidal anti-inflammatory drug. In addition to their varying approaches to attacking migraines, the two drugs may be absorbed by the body at different rates when jointly administered. This sort of combination therapy is common in treating cancer, and it's a good idea.

    A recent paper in the Journal of the American Medical Association (JAMA) presented results from two phase 3 studies of Trexima, which Pozen is developing in partnership with GlaxoSmithKline (NYSE: GSK). In the studies cited in JAMA, patients who received a single Trexima tablet had better pain relief results than patients receiving either sumatriptan or naproxen alone. Other effects of migraines, including nausea and sensitivity to light and sound, were similarly reduced. The authors of the JAMA article also point out that the levels of the two drugs used in Trexima's current formulation may or may not be the most effective combination -- only further study will tell.

    For me, this study leaves a pretty big unanswered question: What is the benefit of a single pill combining two existing drugs, compared to just taking each drug separately?

    I did some more digging and discovered a paper published in 2005, which found that the combination of the two drugs was superior to either given alone.

    With clear benefits to Trexima, it will be interesting to see whether Pozen can get the FDA's thumbs-up. The company has a dubious track record at getting such combination drugs approved; it recently settled a shareholder lawsuit arising from previous failures to do so.

    Both of these drugs are well-known, so approval is likely, though not assured. But I'm also wondering whether insurance companies will foot the bill for Trexima. At the end of the day, sales are all that matter. With both naproxen and sumatripan available as less expensive generics, convincing patients to pay more for a single pill may be tough.

    If Trexima's not approved, Pozen's stock will clearly tank. Any benefits stemming from the drug's successful approval are harder to gauge. The stock price could get a bump up, or it could slump as investors betting on approval sell to lock in gains. In the long term, Trexima's sales will drive Pozen's share price. I don't think the prognosis looks good for either one.
  9. Can you or someone (hopefully IV trader will appear) give a short refresher course on RCs?

    Do you buy the near month straddle or strangle, in this case the Aug, and sell the next month? Then as the announcement date approaches your long position should increase more than the short so you close it out?
  10. IV Trader is the man for these (I'm just a disciple:->). He has an RC topic somewhere on ET.

    An RC is a calendar spread (same strike) where you're long the near month and short a more distant month. You need some combination of IV contraction and movement away from strike so that the far month loses more value than the near month. .

    You can also do both calendars at the same strike (a pair of straddles) or at different strikes (a pair of strangles). I've also ratio written the far month, particularly with the strangles. In my opinion, they're good for earnings plays in the last week before expiration when long premium is more nominal, despite skew.

    A key component is your post earnings IV estimation as well as your expectation for price movement. I would be reluctant to use RC's for an FDA situation because the near month premiums are exhorbitant and a delay would be catastrophic. Nor would I ratio write such a wild card event. Under normal EA situations, if ratioing, it's helpful to be able to support a position in the pre/post market with long or short shares, if necessary. So make sure the shares are borrowable if you ratio the put side.

    In the case of POZN, it's a non starter since the Aug ATM RC's are trading for close to zero which means that there's no profit potential. It will be worth a look 12 days from now but unless premiums change dramatically, it's not a viable approach.
    #10     Jul 18, 2007