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.
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.
Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.
Visit: Interactive Brokers