A Rare Sight

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.



6 Responses to A Rare Sight

  1. Conscience of a Conservative says:

    Shouldn’t our scientists be hard at work curing real diseases?

    • hhill51 says:

      Hard to justify in a profit-driven economy after years of dedicated research to get us to eat more and more (eg corn sweetener and salt in almost every prepared food, especially for children). Now the Holy Grail is a pill to reverse the effects of the prior research. What could be more purely capitalist?

      • Conscience of a Conservative says:

        Howard, Interesting observation. The yield on big pharma along with the pay-out ratio is right up there with tobacco and utility stocks.

      • hhill51 says:

        I think the light dawned for me when I was hearing the pathetic defense for the full list price travesty in Medicare Part D. Since when does the largest customer in the world (Medicare) have to pay as much as twice the price ordinary retailers pay? The defense for that giveaway? That the high prices paid for research. BUT the pharma companies pay more for TV advertising in the United States than they spend on all their research worldwide. If that wasn’t bad enough, other countries have the common sense to stop general advertising to the public for prescription drugs. If there was ever a way to guarantee that we’d use far too many prescriptions drugs, it’s got to be that tag line “ask your doctor about XXX.” All those Medicare beneficiaries who never paid a dime toward drug coverage basically pay nothing for their drugs, and have lots of time on their hands to ask their doctors until the doctors give in and write the scrip.

  2. Conscience of a Conservative says:

    Howard, All good points, and abuses that are directly attributable to a system where the persons that receive the benefit have no interest or stake in how the benefit is paid for. I’ve read a little on how the Swiss health care system is structured and a prominent feature is that it comes with higher deductibles, no group health insurance(e.g. link to work-place).

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