Volatility seller is taking aim at Avanir

By David Russell,

Shutterstock photo

One investor apparently believes that the market is overpricing volatility 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 short straddle , 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 Education section)

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 and crying.

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 session.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: AVNR

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