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By now, everyone know that Vivus (VVUS) PDUFA date for Qnexa is coming up soon. So I won't bore the reader with the details of the drug except to say that there are two major issues: first, whether the FDA will mandate a clinical trial for cardiovascular safety at all (or be content with post-marketing data) and second, if a trial is mandated, will that be pre-approval or post-approval. If it were not for this kink, going long VVUS would be the more logical thing to do. But with an advisory panel voting 17-6 that the FDA should compel companies to conduct cardiovascular studies even if clinical trials do not initially show evidence of increased heart risk, this issue can derail the stock. Thus, if one wanted to hedge one's risk, there are various options strategies.

1. Selling covered calls against stock. Bad strategy since it limits upside while only partially offsetting the downside.

2. Buying naked puts or naked calls. With volatility being so high, the options are very expensive, but it is better than selling covered calls.

3. Butterflies, both calls and puts. This strategy has been detailed by Interactive Brokers at SA. The trader in question was only long - here is what was written:

A large options trade on Vivus, Inc. appears to be a directional bet on the biotech company's shares ahead of impending recommendations from an advisory panel, as well as a possible decision from FDA regulators, on whether to approve obesity drug, Qnexa. Shares in VVUS are down 1.5% today at $20.06. The large call butterfly spread purchased on Vivus in the first half of the trading day yields maximum possible gains in the event that shares soar more than 50.0% in the next three weeks.

The options player responsible for the single largest trade in the name appears to have purchased 3,250 calls at the April $27 and $35 strikes, and sold 6,500 calls at the April $31 strike, all for a net premium of $0.55 per contract. Profits on the 'fly call kick in if shares in VVUS rally at least 37.3% to surpass the breakeven share price of $27.55, while the maximum potential payoff of $3.45 per contract is available to the trader as long as the stock jumps 54.5% to settle at $31.00 at expiration next month. The strategist stands to lose the full amount of premium paid to establish the spread if shares settle below $27.00 or above $35.00. A decision from regulators is expected by April 17th, three days prior to options expiration.

I find butterfly strategies difficult since one not only has to get the time and direction right, but also the range. For that reason, I rarely use butterflies.

4. Straddles. Another SA author had outlined using straddles, which involves buying both calls and puts. While I agree with the author in terms of the month he chose (Jun instead of April due to lesser volatility in June, which makes the June options relatively cheaper), due to very expensive options, the straddle is not cheap and the stock will have to go up at $8 - $10 to justify the trade. On the downside, there is a limit to how low it can go.

5. Calendar Spread/Straddle. My strategy is to use the high volatility of the April options compared to June options. I sold both April calls and puts, strike price 22, while buying an equal number of June calls and puts, strike price 22. Here is what I expect to happen - when the decision comes out on April 17 (or earlier), the value of April options will plummet due to a large decline in volatility. In addition, the time decay for the April options will also have decreased its value more than that for the June options. Thus, it is likely that either way the decision goes, the April calls and puts will decrease in value. In contrast, the June options will have a relatively lower time and volatility decay, thus retaining their value. Thus, I expect to make a profit on both calls and puts for the April options, while losing money one either the call or put for the June option while making money on the other.

Another advantage of this strategy is that if the FDA decides to take 3 more months to make up its mind, the same scenario outlined above will affect the price of the options.

I will let the readers know the outcome of this strategy on April 18 or 21, depending on whether I decide to close the options or let them expire.

Disclosure: I am long VVUS.

Additional disclosure: I am long and short options as mentioned above.

Source: Another Option Strategy For Vivus