Awesome Buy-Write

Have you ever written an option on an ordinary stock with implied volatility north of 200% ?  I just did.

I mentioned Arena Pharmaceuticals the other day when (most of) it was about to be called away.  Sometimes when I feel that a company may be on to something huge that will give me seller’s remorse (the bull market version of buyer’s remorse), I’ll use some of the premium to buy a little extra stock.

Today that stock was ARNA.

In another totally wild day, it’s up more than 10% on the day today.  I bought about half way up this morning, and sold September $6 calls.  I overbought by 10%, so for each ten option contracts, I bought 1100 shares.

The crazy part is that the option premium  was nearly $2 for just eight weeks, and exercise of the option will make me a few percentage points of extra profit.

The net cost is below $4 after selling the option, which is what I paid for this stock when I put it in the flock of pharma flyers last fall.

Wow!  Potential for 50% net profit in just eight weeks!

Now, the down side.  After a couple rounds of selling calls against this stock last fall, I spend most of 2010 underwater on it, even taking the option premium into account.

They got their good news on their main new drug, and it just took off.  Naturally, all but a couple hundred shares got called away from me last week for $5 a share.  That was fine, because I had a solid 30% or more holding period return since first getting involved.

And now I’m back in, and ready to deal with it if the stock turns south and sports a $2 or $3 handle again.  How else could it have 200% volatility?  It has to triple and/or get cut to one third form time to time to justify that kind of time premium.

Not for the faint of heart, that’s for sure!

hh

Elan, on the other hand, sucks.  They had really stellar uptake on Tysabri, the death of which was announced way too early.  Didn’t seem to matter to the stock players.  And make no mistake about it, Elan has been played like a Stradivarius for years.

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2 Responses to Awesome Buy-Write

  1. cyn says:

    Your understanding of the markets, options, making money is stratospheres above my capabilities, but I did long long ago in a universe far far away, take your advice and invested in ELN. Made a ton of money and lost more. Watched it get played and played and played again. Not sure who hates who and why or what back room deals were made, and after all the slicing and dicing I am not sure what is left of ELN besides a royalty company and the money goes into management’s pockets not shareholders. But I did tell you when you brought it up awhile ago on VF that I thought it was going no where for a long time and why I thought so. So for my one and only time this life time I with great pride get to say I told you so ( who ‘da ever thunk it!!!)

    • hhill51 says:

      Because it’s true, I need to spell it out rather than use web acronyms… I laughed out loud when I read your comment.

      Thanks. I appreciate those who disagree and turn out right more than any others.

      Your view that it was going nowhere really nailed it. I get fooled too often by the ramping up of sales and profits with these companies that mark their high stock price while everything is still potential.

      I need to figure out why that is, and try not to be taken in by analysis. (Maybe that will happen with IOC?)

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