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!
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.