Another ARNA Option Play

This is only if you believe that ARNA’s weight loss drug will be approved later this week (the market sure seems to believe it)…..

Anyway, rather than buying the $11+ stock and writing July $11 call options to take out $2 in time premium for 29 days, I looked at the deep in the money calls for July, and noticed I only had to pay about 40 cents of time premium. So I bought the $6 calls for $5 and change, and sold the $11 calls for $2 and change.

It’s all over the place today, but the net effect has been to pay 40 cents of time premium on the $6 calls and sell $2 in time premium on the $11 calls.

In dollars and cents, it takes my net cash outlay down to just under $4 a share, which compares favorably with laying out a net of $9 a share doing the buy-write. I get $1.60 of time premium if both options are in the money four weeks from now in the vertical spread play, where I would get $2 in time premium if I did the buy-write.

If the drug is sent back to the minors for yet another round of testing or even rejected, both strategies will stink, because the stock will become a penny stock overnight.



2 Responses to Another ARNA Option Play

  1. Henry says:

    Hi Howard – are you throwing serious money at these various option plays (like enough to retire on), or are you just speculating with “play money”? Just curious!

    • hhill51 says:

      Hey, Henry….

      I would only use “play money” for this if I didn’t already have a huge position in ARNA, dating back to when it was an extreme vol play a few years ago, and I learned “what could go wrong?” by selling naked puts and calls. That got me in. Then I saw the absurd premium paid for $4 and $5 LEAP calls even when the stock was trading around $1.50 a share. That set my antennae vibrating, when Occam’s Razor told me that the only reason to pay 50 cents for such an option on a $1.50 stock was to avoid declaring the position. I loaded up, and lowered my net cost well under $2 a share.

      Since then, I’ve enjoyed a nice run-up, but now that the 4s and 5s are so deep in the money, I’m watching all the time premia across the complex. Today’s trades added up to real money (though not retirement money), but more important to me was the fact that I balanced out my delta, which had creeped up to a pretty big negative number. I sleep better when the delta (plus or minus) is under a couple thousand shares on a stock like this.

      This play is unique, because no matter what happens, the vol will go out of these options by next week, because the FDA will have their say.

      It’s been crazy over here today, with nearly 100 separate fills on five dozen orders. I won’t and can’t tell the blog folks everything I’m doing, but occasionally one like this shows up. I even tried briefly to put on a deep in-the-money calendar call spread (July/Aug) because it was trading natural (full offer on the buy side, full bid on the sell) as a five cent net credit! They were paying me to take the extra month! I couldn’t take the risk of trying to leg into that one, so the market makers realized their mistake when I entered the order as a complex calendar spread “sell”…. they moved their prices rather than fill my order.


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