Bull Put spreads

[danshirley]

At the time we talked about bull put spreads and ITMN the ITMN March 30 calls were selling for .65. Today they closed at 2.30. It's all about a positive review document from the FDA.

This illustrates the difference in strategies for trading a biotech like ITMN. Buying the 30 call represented a minimum risk compared to doing a bull put spread, and the reward is quite high. You can afford to be wrong a lot when buyng calls in this kind of situation. I like bull call spreads even better.

If the FDA had released a very negative sounding review the result would have been exactly the oposite and a bull put spread would have been expensive to get out of, while the loss on the call would have been minimal.

Without a lot of special information it's really hard to predict which direction things will go on a biotech like this.

I think bull put spreads carry too high a risk/reward ratio for this kind of situation and calls or call spreads are a better fit.

http://www.thestreet.com/_yahoo/sto...rmune.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

 

[rew]

Quote from danshirley:

At the time we talked about bull put spreads and ITMN the ITMN March 30 calls were selling for .65. Today they closed at 2.30. It's all about a positive review document from the FDA.

This illustrates the difference in strategies for trading a biotech like ITMN. Buying the 30 call represented a minimum risk compared to doing a bull put spread, and the reward is quite high. You can afford to be wrong a lot when buyng calls in this kind of situation. I like bull call spreads even better.

If the FDA had released a very negative sounding review the result would have been exactly the oposite and a bull put spread would have been expensive to get out of, while the loss on the call would have been minimal.

Without a lot of special information it's really hard to predict which direction things will go on a biotech like this.

I think bull put spreads carry too high a risk/reward ratio for this kind of situation and calls or call spreads are a better fit.

I was talking about bull put spreads in general. I agree that they're a lousy bet for a biotech stock just before a Phase III result or an FDA announcement, because either the stock tanks and you take your maximum loss on the spread or the stock shoots up and you get a tiny gain. The tricky thing about option plays on small biotechs is that you don't know which way they're going to go and the implied volatility in the options just before a binary event is huge, so buying spreads is not an obvious way to win.