Today I’m watching one of my largest positions take a big run. The move is in response to the European authorities agreeing to consider their developmental drug for weight loss.
I’ve been holding this stock since it was a “darling” and right through its period of being a “dog.” Throughout the time I’ve held Arena (symbol ARNA), I’ve had options positions open. In fact, a big slug of the stock resulted from selling “naked” puts for $5 and $6, and then suffering through the indignity of having the stock fall even farther below the strike price than my premium.
Now I’m back above water, and short a ton of $4, $5 and even $7.50 calls that expire next January.
Needless to say, I’ve been watching both the stock and its options with interest. Imagine my amazement when I saw today that the combined premium for January 2013 $3 calls and puts added up to more than $3!
I’ve only seen this a few times, and I’ve been trading listed stock options since the mid-70s.
To put this into money terms, if you were to sell both $3 puts and $3 calls today, you’d get total proceeds of more than $3, while the stock is trading just below that number at $2.90. It’s a mathematical fact that either the calls or the puts will expire worthless, so it’s possible to buy the stock with the proceeds from the option sale and have a dime left over. You’ll know that you can’t lose money if the stock goes down. In fact, you can’t lose money unless the stock goes above $6.
It’s a fascinating exercise in “binary” events, since the FDA review the company is expecting in late June might send the stock soaring, or back to being a penny stock with limited prospects. I’m just amazed that the options market is handing us a way to own a stock at negative cost.