Thursday, July 29, 2010

Arena Pharma (ARNA) - Big Bio-tech Vol Yields Trade

ARNA is trading $6.45 with IV30™ up 3.5%. The LIVEVOL™ Pro Summary is below.

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 (click to enlarge) illustrates a nice trade, though it is several legs so don't let commissions eat this one up.

Trade Stats
Sep 2 puts: Buy 1 for $0.30
Sep 4 puts: Sell 2 @0.95
Sep 7 puts: Buy 1 for $2.30
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 (click to enlarge):

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! For that matter, don't be too naked long contracts either. Spreads yielding 1:1 long:short contracts are the safest plays here.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. The Sep 5 and 7 are switch around. I believe...

  2. I wrote the wrong price for Sep 7 puts (now fixed), but used the correct price in the PnL. What do you see in the Sep 5?

  3. or the price is off on the sep 7 puts? Thats what I meant!

  4. ok, you were right on the money. ty.

  5. Ophir:

    ARNA faces an FDA panel for its weight loss drug on September 16, one day before options expiration.

    (VVUS faced a similar FDA panel on July 15, again one day before options expiration. The panel voted against VVUS to send the stock down from $12 to a tad over $5. Those of us who had the July 6/5/2.5 put butterfly cashed in.)

    In my opinion, a better trade would be:

    Buy 1 Sep 3 put
    Sell 2 Sep 2 put
    Buy 1 Sep 1 put

    Buy 1 Sep 10 call
    Sell 3 Sep 11 call
    Buy 2 Sep 12.5 call

    If the trade can be executed for a credit, then the trade will NOT lose money unless ARNA trades above $11.50.

    Options are pricing in a $4 move after the FDA panel.

  6. cool; I wrote about VVUS as well on an arb trade. I would be careful to be short naked upside. This can go to $20 hypothetically (not liekly of course, but possible).