One investor apparently believes that the market is overpricing
in Avanir Pharmaceuticals.
optionMONSTER's tracking systems detected the sale of 1,000 June 3
puts for $0.21 and 1,000 June 3 calls for $0.20, resulting in a
credit of $0.41.
Known as a
, the trade represents a bet that the drug maker will close at or
near $3 on expiration. If it does, the investor will keep the $0.41
credit. Gains will erode on either side of that level and turn to
losses below $2.59 and above $3.41.
The trader is also betting that option prices are too high before
the company's earnings report next Tuesday, May 8. If the release
is uneventful, those contracts will probably lose value quickly and
favor their position.
Implied volatility is running at about 61 percent, twice its
historical volatility. That means the market is pricing in a bigger
move than is normally the case. Selling straddles is a common way
to bet against that perception. (See our
AVNR rose 0.67 percent to $3.01 yesterday. It traded as high as
$4.80 last spring, as low as $1.80 in December and is now in the
middle of that range. The company's sales are expected to grow
quickly as its main drug, Nuedexta, gains patients following
approval in late 2010. The compound is used to treat pseudobulbar
affect, a neurological condition that causes uncontrolled laughing
Given that it's still in early stages of market growth, some
investors may not expect much reaction to the numbers, and look for
the stock to move sideways over the intermediate term.
Overall option volume was 9 times greater than average in the
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