Medicis Pharmaceutical Corp.

We have been looking for events to trade, such as earnings or corporate announcements. One of the biotech companies we found was Medicis Pharmaceutical Corp (MRX). They were to announce yesterday that they were working on a license application to the FDA.

Press Release

Their announcement came out at 1:30 AM this morning. Here it is:

“Ipsen (Paris:IPN) and its partner Medicis (NYSE: MRX) announced today that the companies are in active labeling and Risk Evaluation and Mitigation Strategy (”REMS”) discussions with the U.S. Food and Drug Administration (”FDA”) related to the Biologics License Application (”BLA”) for Ipsen’s botulinum toxin type A product in both therapeutic and aesthetic indications. ”

This is a form of Botox used cosmetically (over 5 million times a year in the US) to soften lines of the face, and medically to treat crossed eyes and other muscle spasms.

Selling Straddles

Yesterday, I sold MRX April 12.50 straddles. The implied vol we 200% for April options and the IV for May options was 115% It has a 30 day hist. vol of 99% and the straddle sold for 2.35 when the stock was at 13.

I ran a Monte Carlo calculation to test the trade. The outcome was that the break even points will be violated 15% of the time. So that is good odds especially if the implied volatility were to drop by half to the value of the later month’s option series.

Today the implied volatility of the April options did drop to 90, and the price of the stock came in to 12.69 So the question is, should I stay in the trade to expiration or not? Is it still a good trade or is all the juice squeezed out of it?

Exit the Trade?

Rerunning the Monte Carlo with today’s information, the 12.50 straddle selling for 0.94 with the stock at 12.69 and its historical volatility at 102% It looks like there is a 51% probability that MRX could close outside the break even points.

The expected return for this trade is -$86. Not a good trade. So I will close it out tomorrow morning.

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