Chain of Fools?

It’s embarrassing to admit, but the insurance I bought last week on my ARNA position seems doomed to expire worthless.

Unfortunately, that also took away about 60 cents per share of my net premium collected by selling puts and calls on this beast, which narrowed the range of prices for which the whole position is profitable.

I really feel sorry for the people who bought the calls from me back when I put this position on, since they were paying $2 or more in time value per share.  I guess that makes them the last in the chain of fools and me the second last.

As I noted originally, the options in this stock were commanding such high premiums that a seller of both puts and calls could collect well over half the price of the stock by selling them.  That means, in the simplest terms, that I could withstand having the stock go up or down as much as 50%.

Today, it’s down nearly 40%, and the FDA doesn’t meet on it until Thursday.

For those who bought the stock and sold call options, today’s flurry of negative news and a sell recommendation from Barclays have taken away your profit, but if the music stopped right now, you’d probably be a little ahead overall, since $6 calls were selling for more than $2 when the stock was flying up through the $6 price mark a month or so ago.  In other words, you own the stock for under $4 net, while it’s trading at $4.25 as I write this missive.

That could change for the worse this Friday.

If that happens, I expect that the options will still trade with high implied volatility, so the potential exists to sell more call options to further lower the cost basis, even if the stock is trading with a $3 “handle”this coming Friday morning.

For those who like the bullish story, Piper Jaffrey did come out with the statement that today’s price movement is an over-reaction.   The two other developmental drug companies that address the same obesity treatment space, OREX and VVUS, have both fallen in sympathy, but nothing like Arena Pharmaaceuticals.

Other than feeling dumb for spending money on insurance if the stock went flying upward, I’m still OK with the trade, but expect now that I’ll own a big slug of shares when the puts I wrote expire this Saturday.  My average cost will be in the $3.50 per share neighborhood.

If the stock trades all the way down to $3 or so (its trading range before all the excitement), I expect I’ll get the chance to sell $3 calls for 50 cents, and break even.

At least, that’s the plan, assuming the chain of fools still has one bunch of fools (call buyers) in line behind me.

Now you know why I say I can’t give stock advice.  This stuff happens, and friends of Cramer make it happen (he dissed the stock on his TV show last night).  You and I are way down the food chain from those sharks.

On the other hand, the FDA could approve lorcaserin, and we could have our stock called away from us with a 40% or higher profit in just six weeks or so.

I hope nobody got stupid on this one, but I’m sure a few did.  Hopefully none who did were my readers.

hh

Advertisements

One Response to Chain of Fools?

  1. John says:

    I’m good until 3.51. Thanks for your help with this trade. It was a good speculation, even if it went awry.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: