Lucrative Opportunities In Amarin's Options Market

| About: Amarin Corporation (AMRN)

Although the arguments between Amarin (NASDAQ: AMRN) bulls and bears are starting to become quite stale due to a lack of information about the NCE (New Chemical Entity) status of their flagship drug Vascepa from the FDA (many months after approval, which is rare). There is also the notion, from the bulls, that Amarin is on the verge of an M&A deal which means that Amarin won't have to launch Vascepa into the market alone in Q1 2013. Most of the bulls are expecting an outright acquisition of Amarin, which became an especially good guess after it became public knowledge that AstraZeneca (NYSE: AZN) and Teva Pharmaceuticals (NYSE: TEVA) were interested in buying AMRN to counteract the stagnation in their pipelines.

I've already written more fleshed-out recaps of the situation that Amarin is in, so any investors who haven't been following the stock can catch up with this article, and this article which summarized the vital points made in the company's recent Q3 2012 Earnings Release Conference Call.

The takeaway is that Amarin is in a particularly interesting situation right now. The stock is being pushed upwards by the bulls who are confident in the undervaluation of Vascepa, the patent protection that Amarin has generated for the pill, and the likelihood of an acquisition by a larger pharmaceutical in the near future. Bears point to the high possibility that Amarin does not receive NCE designation for Vascepa, as well as the lack of any M&A activity thus far (implying that there will be no deal). Since both sides do have merit to their argument, I think it's a good time to consider alternative methods for trading AMRN in the short run.

I noticed that the intense two-sided speculation on AMRN stock has resulted in very healthy demand for Amarin options (both calls and puts), which caused the premiums on the contract to become quite significant. While Amarin is a very volatile stock that warrants high premiums on its options contracts to begin with, I find that there are a handful of particularly good deals for investors on both sides of the AMRN trade as well as investors who have no positions.

Calls (see image below for figures from premarket hours, 11/26/12)

Let's start with the December calls. While there are some AMRN traders who are actually attempting to sell December call options at strike prices as outrageously high as 30.00 right now, we will stick to the "down to earth" options (or the "near the money" options highlighted in blue). The current range of strike prices for these near the money options is 9.00-14.00.

AMRN closed last Friday at $11.21/share, so investors can immediately see hefty premium potential for new AMRN investors who buy a position at the market price and sell covered calls against the position. For instance, someone who bought 1,000 shares of AMRN for $11,210 could immediately earn $1,200 through the sale of 10 December call options at a strike price of 12.00 and a premium of $1.20 (I will use the bid price).

If the stock moved above the strike price prior to December 22nd, the investor would lose the AMRN shares but at a gain of $790 (remember, the shares were bought for $11.21 and sold at $12). The total monetary gain for this theoretical investor would be about $1990 - a 17.8% return.

AMRN shareholders who bought in at higher average prices (anything significantly higher than the market price of about $11.21/share) would probably want to settle for the smaller premiums for higher strike-price options contracts to avoid the possibility that their AMRN stock gets sold for an unfavorable price. While higher strike-price call options have smaller premiums, AMRN's options market right now is so healthy on the demand side that the returns are still very outsized. It's particularly amazing to even see $.15 bids for December 20.00 AMRN calls!

Puts (see image below for figures from premarket hours, 11/26/12)

Another strategy that is particularly useful for investors that have not bought AMRN stock (but want to, perhaps to reap the gains from the lucrative covered-call trade described above) is the selling/writing of naked put options. These investors would simply hold their cash, and sell the right for AMRN stockholders in the broader market to sell to them at a particular price.

For anyone who actually wants AMRN stock, this is a great way to buy Amarin at a discount to market price. The latest bid on 9.00 put options was for $.40, which provides an unlikely opportunity for the put writer to buy AMRN at $9. Even if AMRN does not fall below $9/share (which is likely, unless the company experiences some sort of disaster), the put writer gains $40 for each contract written. This strategy would actually require a bit less cash than the covered call strategy described above, assuming that both traders are working with 1,000 shares of AMRN (which means they are writing a total of 10 options contracts.)

This was a very brief overview of the situation, and doesn't flesh out the many possibilities that are available in AMRN options right now. There are a plethora of much more complicated and advanced options strategies that offer even more control for investors who want to tailor their bets on AMRN with precision, but even someone with a rudimentary understanding of options can see how lucrative options premiums can become for a speculative and volatile stock like AMRN.

Clearly there is always a catch. The covered call strategy, for instance, is vulnerable to massive downwards movement in AMRN stock (although it still offers a small "shield of gains" that a standard investment in AMRN wouldn't have.) Perhaps more scary to the AMRN bulls is the potential for the company to be bought at something like $20/share. Someone who sold call options at a strike price of, say, 15.00 would miss out of $5/share in gains.

The naked put strategy also has one big downside. If AMRN had a disaster of some sort and dropped to $5/share, the put options would force the writer to buy AMRN at $9/share with only $.40/share as compensation. This clearly has a better outcome than the direct purchase of AMRN at $11.21 (which would result in 55% losses instead of 42% losses), which is why naked put strategies are recommended only for investors who actually want the stock they are writing contracts for.

Hopefully this has been useful to whoever has been reading. The AMRN options market will probably not stay a gold mine of contract premiums forever though, so it is vital to take advantage of any lucrative opportunities sooner - while the demand side stays strong.

Disclosure: I am long AMRN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also trade AMRN options

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Tagged: , , Drug Manufacturers - Other, Ireland, Options
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