If someone told me I have a 50-50 chance of winning, and if I do win I can make as much as 3000% profit, I would take the bet every day of the week.
Medivation is gearing up to announce results from a phase III study of Dimebon which, if positive, could send the company's stock price soaring. If the Dimebon study fails, look out below. Dimebon is an experimental drug to cure Alzheimer's disease. The formal announcement of Phase III results is currently expected in early March.
First a little background. About 5 million Americans and 30 million people worldwide suffer from Alzheimer. If the Dimebon study is positive and leads to the drug's approval, sales could easily top $1 billion. When Medivation released Phase II results, the data rocked. Now, we are waiting for Phase III results.
Here is a great article for those willing to dig a little deeper about the history: http://www.thestreet.com/story/10668572/1/medivation-poised-for-volatile-spring.html
The volatility expected in Medivation's stock price is scary and exciting at the same time. March and June implied volatility is elevated to north of 150. At-the-money straddle suggests 40% move in either direction by March and 60% by June expiration.
I love volatility. To me, if there wasn't volatility in the market, I probably wouldn't be in this business. I like to make volatility my friend by buying and selling with different strikes and months to make the best risk/reward trade.
Very similar to my trade earlier about ITMN (see the archive folder), I want to play on the long side with the following unbalanced skip-strike butterfly spread:
- Buy to open 10 contracts of June $40 calls
- Sell to open 25 contracts of June $55 calls
- Buy to open 15 contracts of June $65 calls
The mid point on this spread is $0.25 and the natural offer price (if you just want it at the market price) is $1.70 as of this writing. Given a wide disparity between bids and asks, I tried for $1.00 and the order got filled immediately. You might be able to get in for less than $1.00. Take a look at the attached hypothetical P&L chart. If the stock lands anywhere between $40 and $65, you make a killing. This is a $500 trade that can produce as much as $14,500. If the results are bad and the stock collapses, or the results are so good that it shoots above $65, then all you lose is $500. The risk/reward doesn't get any better than this. I love the odds (similar to my other trade in InterMune or ITMN).
Quick note: Even though results are expected in March, I am doing this trade in June because there is always a possibility that results won't be announced before March expiration.
Good luck!
