I have been trading for a long time, almost one third of my life. My mental framework has been built up from reading the Market Wizards books by Jack Schwager, and one of the biggest lessons I have learned from all of them is to look for asymmetrical trading opportunities. What are those? Trades where the downside is trounced by the potential upside.
A good relevant example might be Dendreon's (NASDAQ:DNDN) first FDA ruling a few years ago. In case you missed it, DNDN was trading around $2-$3 with a massive short interest and then had favorable news and popped somewhere between $15-20 on the subsequent squeeze in the following hours. I think Vringo (VRNG) is offering a similar trade setup with an additional perk: possibly underpriced/underappreciated options and warrants.
The point is, when a low-dollar stock like Vringo has a large short interest and a big binomial event looming in the near future, it represents a good risk/reward trade. If they lose their suit against Google (NASDAQ:GOOG), the stock will, of course, go down, but the large short interest will cushion the fall. If they win, the shorts act like gasoline on a fire. And remember, the stock price is already low to begin with - it can't go below $0!
Options (and warrants) pricing has gotten really efficient, but one thing they still do poorly is evaluate company-changing future events. That means you can further reduce the amount of downside by using these derivatives. February 2012 $5 call options are trading around $1.20 and give you four months of exposure after the onset of the trial on the "Rocket Docket" in Virginia. If you have read a little bit about this, even a speedy docket averages 2-3 months. Any positive news or an average court time could make these extremely profitable.
And that brings me to my final discovery. VRNG has outstanding warrants that expire in June 2015 that have been trading $0.35 - $0.45 premium to the February 2013 $5 calls. The differences? The strike for the warrants is $5.06, and the stock would be delivered from the company itself rather than another trader. Oh yeah, and about 16 additional months of time value to get through the inevitable appeals and more interestingly, a look at what they plan to do about the Nokia (NYSE:NOK) patent purchase.
There has been endless debate about Vringo and their lawsuit against Google, but the bottom line for me is that it is a great trade on the long side, because the upside is so much greater than the downside risks.
Disclosure: I am long VRNG. 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 am long VRNG warrants.