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Strategies & Market Trends : Swing Trading With Options -- Ignore unavailable to you. Want to Upgrade?

To: BrooksR who wrote (17)	7/26/2001 11:56:40 PM
From: tuck	Read Replies (2) \| Respond to of 88

Brooks, As I mentioned, I don't do this often. I mainly invest and trade in biotechs these days. Few have earnings and are thus driven by trial results and FDA meetings. The former are hard to time with precision, but FDA meetings are known to the day well in advance. In some cases, the Street can use past experience to price in the outcome, thus precluding a huge move. In some cases, the drug under review is part of a larger pipeline, and success or failure may not produce a huge move. But once in a while, you get an Aviron. It's not a one drug company, but let's say FluMist (& cash ($15/share)) is behind most of its current valuation. Thus success or failure should bring a more violent move than is usual for the situation. Add the skittishness of the FDA these days, the mixed results among kids and adults, etc., and you've got the Street pretty puzzled. In sum, I look for FDA meetings (sometimes you know when pivotal trial results will be announced within a couple of weeks; those can also work) for one drug biotechs. There are probably analogous situations in other industries. Anyhow, regarding Aviron, I ran the numbers through the CBOE calculator (PHLX won't give greeks when the options aren't trading, apparently). I used a stock price of $40.80, a strike and expiration of 40 in August, Dan's number of 179 for volatility, and an interest rate of 5%. If on Friday or Monday (depending on when the committee makes its announcement and the stock and options start trading again) Aviron goes to $25, the straddle is worth about $17.3. If it goes to $60, the straddle is worth $24.3. How about less violence, say $50? The calculator comes up with $18. For $33, it says $14. Note that the thetas are very high this close to expiration, so it is important to close this one fast, particularly on the upside. One poster knowledgeable about Aviron suggested it could be cut in half if rejected. This yields $20 for the stock and about $20.5 for the straddle. I'm not sure what to say about the volatility. Can it change that fast in a couple of days? Comment invited here. Should it go to 150 or 100 in the cut-in-half scenario, I get little change. Volatility at 100 seems to take a buck off the rosiest upside. In theory, one can hold the opposite side for a retrace and maybe get another buck out of it the next day or hour, and I will likely try this. Let's say this takes care of the commissions and bid/ask spreads for the profitable side if I get lucky in guessing the bottom or top. If not, it's a wash. In any case, it looks like I need a good eight to ten points in either direction to make something here. My initial estimates that prompted Mark to rightly question my numbers were the result of forgetting how high the thetas are here. Simple brain failure. Cheers, Tuck