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.
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
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
More than 27,000 contracts changed hands in AVNR on Friday,
about 32 times greater than average.
(Chart courtesy of tradeMONSTER)
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