Also, over 10% of the float is short right now. Expect a massive short squeeze on approval.
SEPR time spread
- Thread starter riskarb
- Start date
Understood. Thanks 
Well, essentially, I have a Saliba type explosion position on. However, the problem with a pure backspread on the front month is the steepness of the skew. It's very very steep. That's a lot to overcome.
Quote from waggie945:
GAMMA, GAMMA, GAMMA, GAMMA, GAMMA!!!
Riskarb, yu da BEST man!
But I bet you learned everything about "Option Volatility & Pricing" not from Sheldon Natenberg, but rather from James Stock!
LOL, you got me... JS is my mentor. Actually, I've never read Natenberg, but skimmed through it, a solid book.
riskarb
It's not a stock I would normally trade any size in, and I haven't. I see risk on the stock to $35, so the time-backspread doesn't appeal to me, the back month volty is still fairly high. I'd imagine the volty is fairly-priced due to the expected move, possibly a little cheap due to the likely outcome on Monday.
I honestly don't like either trade too much, but the straight-calendar will either lose $.25 or make $.50. I see risk on the bakspread, but not much. I simply refuse to pay a debit on a backspread. Knowing it's diagonal doesn't do much for me at these relative implieds. Going deferred increases the smile-edge, but you're buying a lot of vega in the back month.
I'm simply unwilling to put much capital to work here, this is "going out" money, and we're probably looking at a night out at Denny's with the expected proceeds.
riskarb
I would think your right. Common sense would tell me they would cover Friday afternoon. However, I think that some shorts out there feel if its a conditional approval by the FDA, the stock may only pop 3 to 5 pts, but a flat out rejection, and this stock could be at $12. I think they feel their downside is only 3 to 5 pts and their upside is 20 pts. Remember, this company has a bad history with the FDA. When Soltara got rejected by the FDA in 2002 the stock went from 46 to 22 overnight. That's my two cents.
So basically you are delta neutral? Would you have much gamma risk on a big drop? And your other major risk is a vol crush on the Apr's?
On a trade like this, do you actually model the whole thing or just make it roughly delta neutral and let it go?
No gamma risk. I constructed this trade to minimize the vol implosion on the long premium. I did this by buying the guts. Very little vol premium on those. This gives me a lot of upside on either a big up move or big down move. By selling the march vol, I am pretty much protected if the stock doesn't move as the march vol will come in probably 50 pts. Basically, anything over 30 and I am styling. Also if the FDA rejects the drug, I am sitting pretty on a sharp move down to 15 or so. If the stock goes above 40, well, it will turn out very nicely. Personally this stock could open anywhere from 12 to 50. It's anybody's guess. I'm also leaning long deltas.
But this is a huge drug and would literally double the size of their company and make them a possible buyout candidate. The sleep aid business is a 3 billion dollar a year industry that will be over 5 billion in a couple of years. Right now, Ambien owns that space. But this drug supposedly does not allow the user to build up immunity to it over time and also avoids the common morning after hangover associated with sleeping pills.
But the situation is not as black and white as getting approved or not. The key will be in the wording. SEPR is looking for the FDA to verify the studies that show that it indeed does do the things it says it does. Also, shareholders of the stock are looking for some guidance as to how aggressively the drug can be marketed and sold. People want to see this drug on the shelves by this summer. That is very aggressive. So approval can take many forms. If the drug gets a full approval and they can get this thing out fast, well, $50 a share is not unreasonable.
Also, I am not long the Aprils. Aprils are way too pricey.