Wednesday, December 8, 2010

Orexigen (OREX) - FDA Decision Out, Stock Pops & Recap

OREX is trading $10.37, up huge on FDA news. The LIVEVOL™ Pro Summary is below.

FDA panel recommends approval for ContraveA Food and Drug Administration panel on Tuesday recommended that the agency approve Orexigen Therapeutics Inc.'s weight loss drug Contrave, making it the first in group of competitors to get a positive nod from experts. The panel of experts voted 13 to 7 for Contrave's approval, and 11 to 8, with an abstention, that additional studies be conducted on heart risks. Experts had voiced safety concerns on the drug, but determined the benefits outweigh the risks.
Source: AP

I wrote about OREX, pre-news, on 11-30-2010. You can read that post here:
Orexigen (OREX) - Trading a Bio-tech and FDA News

I felt that the options market reflected a better chance that the FDA would approve than not. Specifically, with the stock trading $5.38, the Dec 4 puts were priced the same as the Dec 9 calls. It looks like the options market was right... this time.

The stock is whipping around, so as of ~ 9:40am EST, let's take a quick look at the Options Tab, below, and the possible trades that we analyzed. It does feel like the stock is headed a touch lower as of right now. It looks like it was as high as $12 pre-market.

Possible Trades to Analyze
1. Bet on a muted move, like HGSI:
Sell the Dec 6 straddle @ $3.70
Buy the Dec 3/9 strangle for $1.15
Open: $2.55 credit
Close: $2.80 debit
Net: $0.25 loser (-10%)

2. Go to Jan for the bet on a muted move:
Sell the Jan 6 straddle @ $3.95
Buy the Jan 2.5/9 strangle for $1.25
Open: $2.70 credit
Close: $2.70 debit
Net: Unchanged

3. Bet on a big move up:
Buy the Dec 7/11 call spread and pay $0.95.
Open: $0.95 debit
Close: $2.85 credit
Net: $1.90 winner (+200%)

An alternative is the 8/11 call spread for $0.50 if possible,
Open: $0.50 debit
Close: $1.95 credit
Net: $1.45 winner (+ 290%)

4. Bet on a smaller move up:
The Dec 6/8 call spread for $0.55 seems reasonable.
Open: $0.55 debit
Close: $1.90 credit
Net: $1.35 (+ 245%)

5. For you risk lovers, a Dec 5/8/11 long x short x short call spread costs $0.40.
Open: $0.40 debit
Close: $1.50 credit
Net: $1.10 (+ 275%)

6. Do nothing, just watch...

So, in this case, given the upside tilt to the options market, obviously getting long the deltas was a winner. Selling the meat and buying the wings to cover proved to be a loser, but a small one. Of all the bets, I think I liked that one the best - though this time it would have been a losing bet.

This is trade analysis, not a recommendation.

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1 comment:

  1. Ophir,
    Not yet, the stock has retreated and we still have one week to go, an iron condor 4/2 and 7/9 still has a chance as the IV continues to decline and the stock approximates 7 which I happen to believe it will happen by next week.