Options Brief: Vivus (VVUS)

VVUS – VIVUS, Inc. – A three-legged options combination play on biopharmaceutical company, Vivus, Inc., appears to be the work of an investor building up downside protection on the stock in case the firm’s obesity drug, Qnexa, fails to garner support from the advisory committee to the Food & Drug Administration during their meeting scheduled for July 15. Vivus’ shares have had a terrific run up this week having rallied 27.66% from an intraday low of $9.47 on Tuesday up to today’s high of $12.09. VVUS shares are currently up 1.11% on the day to arrive at $11.82 just before 12:30 pm (ET). One savvy options investor opted to sell out-of-the-money call options in the July contract in order to partially finance the purchase of a debit put spread. The transaction is a smart trade particularly if the advisory committee does not advise the FDA to approve Qnexa because Vivus’ shares will likely plummet on such news. The investor purchase 2,500 puts at the July $9.0 strike for a premium of $2.05 each, sold 2,500 puts at the lower July $7.0 strike for a premium of $1.10 apiece, and sold 2,500 calls at the July $20 strike for a premium of $0.35 a-pop. Net premium paid to enact the transaction is reduced to just $0.60 per contract. It seems likely the trader is long shares of the underlying stock. If this is the case, the investor is protected in case shares plunge 28.9% from the current price to breach the average breakeven point on the puts at $8.40 by expiration day. July contract options expire the day after the advisory committee is set to assemble. Additionally, the sale of the calls not only reduces the price paid to purchase downside protection, but also yields an effective exit strategy for the trader should shares of the underlying stock surge 69.2% to exceed $20.00 by July expiration. Vivus’ shares are likely to rally hard and fast if Qnexa scores well with the advisory committee next week. Options traders exchanged more than 49,000 contracts on Vivus, Inc. by 12:40 pm (ET). Vivus was rated new ‘outperform’ with a 12-month target price of $20.00 at Wedbush yesterday.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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