On July 15th the FDA Panel will be reviewing the weight loss drug made by Vivus.
If the panel gives a positive review of the drug then the stock can jump 50%, if they give the weight loss drug a negative review then the stock can drop 50%. Basically we are talking about VVUS being eiter $5 of $15 on July 16th.
The Volatility of the options are 266%.
The option trade that I am considering is a covered call. (ie. buy the stock, sell the call option)
If we buy the stock at the time of writing this article, for $9.72 and we sell the $7 call for $4, that give me a break even if the stock falls to $5.72. If the stock stays above $7 through option expiration, that means it would have to drop almost 30%, we stand to gain 20%.
Basically it is a risk of losing 10% and a potential reward of gaining 20% in 2 and a half weeks.
The reason we say it is a risk of losing 10% is because the options are looking for a move to $5 of $15. Usually the market makers are accurate and if it does drop, it will only drop to the amount of the at the money strangle.
We plan on buying a covered call position before July 15th, between $5.50 & $5.70.
We currently hold no position in VVUS.
Article originally published July 2010.