Volatility seller targets Avanir

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Avanir Pharmaceuticals is expecting a huge ruling from the Food and Drug Administration next month, and one investor apparently believes that the market is overpricing the stock's ability to move on the news.

AVNR Chart optionMONSTER's tracking systems detected the sale of more than 10,000 each of the December 2.50 calls and December 2.50 puts in the drug developer. The calls fetched $1 to $1.20 while the puts brought in $1 to $1.05, letting the trader receive a combined credit of $2- $2.25.

That is a huge amount given that AVNR closed at $2.71 on Friday. The stock would have to fall below $0.70 or explode toward $4.75 to $5 for the position to lose money.

The FDA is expected to approve or reject the company's Zenvia medicine by the end of October. The drug treats a condition known as pseudobulbar affect, which causes involuntary fits of laughing and crying.

The stock's implied volatility is valued at 190 percent ahead of the news--more than quadruple AVNR's propensity to move over the last month. Selling both calls and puts, a strategy known as a short straddle, is a common way to profit because the high implied volatility inflates the value of options overall. (See our Education section)

More than 27,000 contracts changed hands in AVNR on Friday, about 32 times greater than average.

(Chart courtesy of tradeMONSTER)



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

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This article appears in: Investing , Options

Referenced Stocks: AVNR

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