Monday, November 1, 2010

Avanir Pharma (AVNR) - Examining the PDUFA Bio-tech Trading Results

AVNR is trading $5.10, up 110.7% with IV30™ down 75.2% on the FDA drug approval. The LIVEVOL™ Pro Summary is below.


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On Friday, with AVNR trading $2.81, I wrote this:
Avanir Pharma (AVNR) - Analyzing a PDUFA Date & Trades

The Options Tab on Friday is included (below).

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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  1. Ophir,

    The cost of 3 straddle was 2.4 and 2/4 strangle 1.3 so total cost was 1.1. Today the 4/3 put spread is worthless and ¾ call spread is worth 0.95. How do you calculate that this trade was a nice winner? Or did you use different strikes?

  2. Wait 'til expo, but you're right, as of right now, it's sort of a push. I was thinking of selling the 1 put as mentioned in the blog prior (i.e. the 1/5 strangle).

  3. Well, selling 1/5 strangle would get you around 0.5, so the total cost would be 1.9. The 4/5 call is trading now around 1.7. Even waiting till expiration would produce very small gain.

    There has to be a better way to play those FDA approvals.

  4. Actually, the $1.90 sale of that trade would have been great. I wish I would have seen that. Max loss $0.10...