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XenoPort Inc. (NASDAQ:XNPT) is set to receive notification from the FDA on April 6 whether or not their restless leg syndrome drug Horizant is approved. I intend to trade this event using both a bullish and bearish approach – as of writing, however, I have only managed to execute the bullish side of the trade.(1) Here is the trade:(2)

Bullish side:

  • Buy 34 APR 8.0 strike Call for 1.72 = $5,846
  • Sell 12 APR 9.0 strike Call for 0.745 = ($894)
  • Sell 44 APR 10.0 strike Call for 1.355 = ($5,962)
  • Buy 22 APR 12.0 strike Call for 0.74 = $1,628

Initial Position P&L = $618
(Click to enlarge)

In this structure, my total risk is the debit of $618 – this is the most I can lose. I can make up to $5,000 if XNPT trades to $10 by expiration and above $12 I make around $600 – options are currently pricing a $3 ~ $4 move so achieving the upside profit seems possible in a positive scenario. It should be noted that I only managed to partially fill the trade thus the awkward contract ratios.

For the bearish side of the trade (which due to lack of liquidity has yet to be filled) I am considering buying either a 3/4/5 strike Put butterfly (i.e. buying 50 3.0 strike Put, selling 100 4.0 strike Put and buying 50 5.0 strike Put for <0.20 per spread) or buying a 3/4 strike Put spread (buying 100 4.0 strike Put and selling 100 3.0 strike Put for <0.30 per spread). On a negative outcome scenario, a downside price target should be around $2.50 ~ $3.00 based on option implied prices and approximate cash per share values which may bend my consideration against using the butterfly structure.

(1) As of writing, and due to lack of liquidity in the Puts, I have only managed to trade into the bullish (i.e. Call) side.

(2) Please note that trade-in amounts occurred over several days thus they may be different from current market prices.

Source: Trading XenoPort's PDUFA Event