Options Trade of the Day: Fraud Charge May be Behind Put Spread on MannKind Corp.

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Things are getting hairy for the shares of MannKind Corp. ( MNKD ) today, with the stock plunging as much as 18% at one point. Sparking the selloff was a report on TheStreet.com that former senior director John Arditi accused the company of fraud in failing to report serious problems with Afrezza, its diabetes treatment, to the Food and Drug Administration. MannKind has denied the claims, but that has done little to staunch the stock's losses, or to stem speculation in the options pits.

Looking to take advantage of a potentially steep decline in MNKD shares, one trader appears to have opened up a bearish spread trade on the security. Specifically, a block of 2,400 January 2011 5 puts traded for the ask price of $1.27, or $127 per contract, at about 9:30 a.m. Eastern time on the New York Stock Exchange (NYSE), suggesting that these contracts were bought to open. At the same time, a block of 2,400 January 2011 4 puts traded for the bid price of $0.70, or $70 per contract, suggesting that the contracts were sold to open. Both blocks were also marked "spread." Given this data, it appears that the trader opened a vertical put spread, or debit spread , on MannKind Inc.

MNKD option volume details

The Anatomy of a MannKind Inc. Vertical Put Spread

Breaking down this debit spread position, the trader purchased 2,400 January 2011 5 puts for the ask price of $1.27, resulting in a debit of $304,800 -- (1.27 * 100) * 2,400 = $304,800. In the absence of the premium received by selling the January 2011 4 put, the trader would need MNKD to drop roughly 40% from Wednesday's close at $6.19, to $2.46 per share, in order for the position to reach breakeven at expiration. Furthermore, the maximum loss on this leg of the position is limited to the initial investment of $304,800.

The second leg of the debit spread helps to offset the cost of the overall position. In this case, the trader sold 2,400 January 2011 4 puts for the bid price of $0.70, netting a total credit of $168,000 -- (0.70 * 100) * 2,400 = $168,000. Combining this leg of the trade with the purchased January 2011 5 put lowers the total cost of the entire position to $136,800 -- $304,800 - $168,000 = $136,800.

MNKD vertical put spread

MNKD profit loss chart

Implied Volatility

After the vertical put spread has been established, rising implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. At the time of the trade, implieds for the January 2011 5 put arrived at 167.34%, while the implied volatility for the January 2011 4 put came in at 174.73%. For a point of reference, MNKD's three-month historical volatility was 44.05% as of the close of trading on Wednesday.



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This article appears in: Investing , Options

Referenced Stocks: MNKD

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