Analysts' commentary is very mixed and price targets are all over the place from as high as $50 and as low as $6. The stock closed around $23 on Friday. As with any biotech, you can never be even remotely assured of what's going to happen. In my personal opinion, chances of approval are high and any further gains from here will be limited given nearly 60% run the stock already had on Friday. However, that's just my opinion and the market believes otherwise. Interestingly, on Thursday at $14/share, the straddle was pricing $9 move. On Friday at $23/share, the straddle is still pricing $11.50 move. Go figure.
My inbox is full of readers this weekend asking me to provide other ways to trade the stock going into FDA decision that provide the best risk/reward. So, here they are:
1. If you believe the treatment will get approved and the straddle is under-priced despite 60% run on Friday, then I suggest the following bull ratio spread:- Sell to open 1x March $25 calls
- Buy to open 2x March $30 calls
The spread is going for 5 cent credit. If the stock collapses, you lose nothing (and hopefully 5 cent will pay off your commissions). If the stock takes off above $35, sky is the limit.
2. If you believe the treatment will be disapproved, then you sure also believe that straddle is way under-pricing the potential move to the downside given 60% run on Friday. In that case, I suggest the following bear ratio spread:- Buy to open 2x March $30 puts
- Sell to open 1.5x March $35 puts
The spread is going for $1.80 credit. Keep in mind this is 1.5x/2x spread. The trade starts turning a profit on a move below ~$17. If you're wrong here, you will still make money if the stock goes above $35 as $1.80 credit will be retained and puts will expire worthless.
- Buy to open 1x March $20 calls
- Sell to open 2x March $25 calls
- Buy to open 1x March $30 calls
The butterfly is going for $0.60 debit. The trade will produce monster profits anywhere between $20.60 and $29.40.
- Buy to open Jan'11 $15 puts
- Sell to open March $15 puts
The spread is going for $1.45 debit. Note that I am suggesting Jan'11 options instead of April to avoid a situation where it gets delayed later than April. Also, I am suggesting $15 puts because any delay should easily bring sellers out knocking the stock down. Also, note that I have adjusted IV down to 75 for both March and Jan'11 to show true nature of P&L.
One reader asked about Mar/Apr 12.50/30 double diagonal calendar spread, similar to so many other times when we took advantage of sharply elevated front month IV. That would not work. The issue is Vega. The difference between March and April Vega on both strikes is 0.01. Meaning, the decay in IV in April will have at least 1.5x more negative impact on April options than March. Unless, the stock can be pinned exactly or very close to $12.50 or $30, the trade will most likely remain at a loss after the announcement.
Lastly, one reader asked about setting up ITMN in exactly the same way as I suggested AMLN trade on Thursday. For more info, go to AMLN Trade. My issue with this set up on ITMN is the bid/ask spread in Jan'11 options is ridiculous and they're not very liquid. I am afraid of overpaying. Also, the ratio of calendar spread against straight call would have to be very high (near 10-1) for the trade to work, which sharply increases the cost.
Folks, I am giving you the setups, you make the call. I will never advise just buying calls or puts in a biotech company waiting FDA decision in two days. If that's what you want, you're searching in a wrong place. The idea here is to make the best risk/reward play given your sentiment.
Good luck!
