AVNR – Avanir Pharmaceuticals, Inc. – Shares of the pharmaceuticals firm fell as much as 9.6% this afternoon to an intraday low of $2.64 on news the company filed for a mixed shelf offering for up to $75 million. Options volume on the stock surged late in the session after one strategist sold a straddle in the December contract. The short straddle suggests the trader expects AVNR’s shares to trade within a specified range through expiration day in the final month of the year. The investor sold approximately 8,440 puts at the December $2.5 strike and sold 8,440 calls at the same strike to take in gross premium of $2.025 per contract. The straddle-seller retains the full amount of premium received if Avanir’s shares settle at $2.50 at expiration. However, the short stance taken in both call and put options expose him to losses should shares shift significantly in either direction away with from the strike price selected. Losses are certainly limited to the downside because shares cannot fall below $0.00. Thus, the investor faces maximum potential losses of $0.475 per contract in the event that Avanir’s shares are worthless at expiration. Losses could be more painful if AVNR shares suddenly fly upward. Shares would need to jump 71.4% to shatter the current 52-week high on the stock of $3.72 in order for losses to start to accumulate for the trader above the effective breakeven price to the upside at $4.525 by expiration. The strategy seems to indicate that the investor does not see AVNR shares collapsing to $0.00, but also suggests shares are not likely rally substantially any time soon.
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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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