Tuesday, November 30, 2010

Orexigen (OREX) - Trading a Bio-tech and FDA News

OREX is trading $5.38, down 3.8% with IV30™ up 3.1 to 293.11%. The LIVEVOL™ Pro Summary is below.

This is a bio-tech with major event news coming soon. It's another weight loss drug so see VVUS and ARNA for their stories. OREX's new weight loss drug will be reviewed by a panel of FDA experts on Tuesday Dec. 7. Cathy Clay brought this to my attention and Michael Rubin helped in the research.

The FDA will release some review documents and staff comments on the new drug on Friday Dec. 3 previous to the panel.

Some news:
SAN DIEGO (TheStreet) -- Orexigen Therapeutics(OREX_) brings its weight-loss drug Contrave to a panel of experts convened by the U.S. Food and Drug Administration on Tuesday, Dec. 7. Here's what you need to know:

It's difficult to place odds in Orexigen's favor given the bad outcomes of the previous weight-loss drug panels and FDA's obvious concerns about the long-term safety of drugs like these. Still, Orexigen's advantage is having the third weight-loss drug reviewed by FDA behind Vivus and Arena. Orexigen should have learned enough from the previous panels to put together a presentation that answers the obvious safety questions that will be raised and argues strongly for Contrave's approval.
Source: Click to read article from TheStreet.com

Alright, alright, enough of that... Let's look to the vol chart to start. IV30™ is red, HV20™ is blue and HV180™ is pink.

So the vol has ripped up, had a bit of a dip there, but is now rising into the news.

I wrote a few times about HGSI, selling the meat and covering with the wings turned out to be a very nice winner, but ya know, bio-tech is bio-tech...

Let's look to the Options Tab below.

Dec vol is 380 compared to just 240 for Jan, so the options market reflects a pretty high certainty that the news is coming out this cycle.

The Dec 4 puts and Dec 9 calls are worth about the same, so the option market reflects about equal odds that this thing goes below $4 or above $9 (I know that's not quite true, the real-world probability measure is skewed to account for infinite upside, but you know what I mean).

Possible Trades to Analyze
1. Bet on a muted move, like HGSI:
Sell the Dec 6 straddle @ $3.70
Buy the Dec 3/9 strangle for $1.15
This yields a $2.55 credit (Max Gain) and a $0.45 Max Loss, or a 5.67:1 ratio. If OREX stays in the range ($8.55, $3.45) at Dec. expo, this is a winner.

2. Go to Jan for the bet on a muted move:
Sell the Jan 6 straddle @ $3.95
Buy the Jan 2.5/9 strangle for $1.25
This yields a net credit of $2.70 (MaxGain). MaxLoss is $0.30 to the upside but $0.80 to the downside. I've included the PnL chart for this one.

3. Bet on a big move up:
Buy the Dec 7/11 call spread and pay $0.95. That's a $3.05 MaxGain to $0.95 MaxLoss or ~3.2:1 ratio.

An alternative is the 8/11 call spread for $0.50 if possible, that's a 5.5:1 MaxGain:MaxLoss ratio, though it requires OREX pop passed $8.5 which would be 58%!

4. Bet on a smaller move up:
The Dec 6/8 call spread for $0.55 seems reasonable. Note that the Dec 4/6 put spread is $1.40 and the Dec 3/5 put spread is ~$1.20. Yikes...

5. For you risk lovers, a Dec 5/8/11 long x short x short call spread costs $0.40 to try to make $2.60 but is naked upside after $11. It doesn't lose until OREX shoots passed $13.60. Naked options in a bio-tech is very risky...

6. Do nothing, just watch...

This is trade analysis, not a recommendation.

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  1. Stocks at 12 in the ah session.

    Looks like these were UNDERPRICED.

  2. Yup, initial pop looked crazy, but as of the close stock is in the $8.70 range.

  3. Well to be honest i have know about another weight loss supplement and it's Calotren which is a herbal product. But after reading here about this new product i am excited to have a look.