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Pharmasset (VRUS) is currently trading at a price of $128, a substantial discount to the offer made by Gilead (NASDAQ:GILD) to purchase VRUS for $137 in cash on November 21st. The deal is expected to close in Q1 2012, possibly as early a January 12th which is when the voluntary tender offer expires.

VRUS shareholders were spooked on December 16th, when VRUS announced that it would discontinue one arm of the Phase IIb QUANTUM trial, specifically, the arm associated with PSI-938 as the company detected laboratory abnormalities with liver functions in subjects. Although laboratory abnormalities where not detected in PSI-7977, which is what GILD is interested in, investors and traders sold off VRUS to $120 in the premarket announcement.

Even though the announcement did not trigger the “key product event” clause set forth in section 4.1(t) of the Agreement and Plan of Merger entered into by VRUS and GILD on November 21st, traders and investors alike realize that such a trigger could send VRUS shares to prices lower than prior to merger announcement.

The enticement for buyers of VRUS to potentially make 6% in a few short weeks and the enticement of short sellers to potentially make lots more if the deal breaks has created opportunities in the VRUS options market, even if you have no opinion on the merger.

Let’s take a look at some of the scenarios:

If you think the deal closes:

Consider doing these spreads in lieu of buying VRUS stock:

Buy the VRUS January 130 calls and;

Sell the VRUS January 135 calls for a total debit of $4.

The risk here would be your total cost $4. A timely close of the deal would make you $1, or 20% compared to the 6% of purchasing VRUS stock.

Or if you think the deal does not close;

Consider doing these spreads in lieu of shorting VRUS stock:

Buy the VRUS February 95 puts and;

Sell the VRUS February 90 puts for a total debit of .50.

The risk here would be your total cost of .50. If GILD should walk away from this deal for any reason, the spread could potentially be worth $5, making you a profit of $4.50 on .50 investment.

Or if you think the deal may be delayed for any reason:

Consider doing these spreads for low-risk high potential returns:

Sell the January 130 calls and;

Buy the January 135 calls and;

Sell the January 95 puts and;

Buy the January 90 puts for a total credit of $4.50

The risk here would be that if the merger is completed or fails prior to January expiration, the spread sold would be worth $5 and you would suffer a .50 loss. However, any delay past January expiration could make the above spread worth less than $4.50 and potentially worth zero as its intrinsic value is now.

Or:

Buy the February 135 call and;

Sell the January 135 call for a total debit of .35.

The risk here would be your total cost of the spread of .35 if the merger is completed or failed prior to January expiration. However, a delay could render the January 135 calls worthless and the February calls could be potentially worth as much as $2.

Source: Pharmasset: M&A Presents Interesting Options Plays

Additional disclosure: I have delta-neutral options positions with a slightly long bias.