Yesterday we discussed buying a straddle or a dual calendar spread on Savient Pharmaceuticals in anticipation of the FDA advisory panel announcing their findings on SVNT’s new gout drug.
Straddle
Yesterday the June 10 straddle cost $4.00 when SVNT was $9.29. Today, SVNT is $12.35, and the straddle is worth $2.50. A loss of $1.50 per straddle.
Dual Calendar Spread
We set up the dual calendar spread so that the return distribution would look have two peaks, one at 5 and the other at 12.50. Look at the profit diagram in yesterday’s post.
To even out the height of the two peaks, we sold 3 June 5 Puts and bought 3 September 5 Puts for every one June 12.5 Call we sold and one September 12.5 Call we bought. (I didn’t do the trade since I was worried about volatility collapse without enough movement in the stock to compensate.)
Yesterday, we would have taken in $0.45 * 3 for the June 5 calls sold and paid $1.25 * 3 for the Sep 5 calls bought. Debit = $2.40.
Yesterday, we would have taken in $0.65 for the June 12.5 call and paid $2.15 for the Sep 12.5 call. Debit = $1.50
Total debit = $3.90
Today, the June 5 put is worth 0 and the Sep 5 put is worth $0.30. So to unwind the put side would yield a credit of 3 * $0.30 = $0.90
We would have to pay $0.40 to buy back the June 12.5 call and earn $2.35 when we sold the Sep 12.5 call. Net credit = $1.95.
Total credit = $2.85
Net loss = $1.05 better than losing $1.50 on the straddle but not a good result.
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