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The Deliberate Trader
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We are semi-professional traders. By that we mean that we are accomplished professionals in other fields, who have gained knowledge, skill and experience at trading the markets almost as a matter of self-defense. We were dissatisfied at the way fund managers, investment “professionals” and/or... More
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The Deliberate Trader, LLC
  • Taking Advantage Of High Option Implied Volatility In ALXA 0 comments
    Nov 28, 2012 1:42 AM | about stocks: ALXA

    For November 28, 2012

    The Trade:

    Buy ALXA stock at 5.00 or better with half a position. Sell ALXA December 5.00 calls for 1.15 to cover the stock. Sell ALXA December 5.00 puts for 1.15 with half a position.

    Execution:

    We will use limit orders to buy the stock and sell the options. However, we may need to recognize and apply some flexibility in order to obtain fills. We will attempt to bring in a total of 2.30 of option premium on the trade.

    The Objective:

    Alexza Pharmaceuticals, Inc. (ALXA) is developing Adasuve, a medication for the treatment of agitation associated with schizophrenia or bipolar disorder in adult patients. The FDA is supposed to issue its approval decision on December 21, 2012, the day before these options expire.

    Meanwhile, on November 19, 2012 the company announced that it has received a Committee for Medicinal Products for Human Use (OTCQB:CHMP) Day 180 Second List of Outstanding Issues from the European Medicines Agency regarding Adasuve. The CHMP Day 180 Second List of Outstanding Issues contains no major objections to the Adasuve application, indicating that the two major objections previously listed have been resolved. Alexza expects to receive the CHMP Day 210 Opinion in December 2012 regarding its Marketing Authorization Application.

    In the event the market closes above 5.00 on December 21, 2012 the shares will be called away, the put options will expire worthless and we will be left with a profit of 2.30 on a 10.00 investment, with our capital at risk for less than 30 days. This is as if the stock were to close at 7.30 on December 21, 2012 with a sale of the shares on the close. Of course, it may trade higher or lower. The annualized return on invested capital is over 270% if the shares are called away; and that is our objective.

    Risk Control:

    The trade carries significant risk; and it should only be traded from within the speculative segment of the portfolio. The risk is that the stock sells off below 3.85 a share, which is our break even point for the trade. This is 23% below the present market price. It is also below support on both candlestick and point and figure charts. We think that this is an acceptable cushion against the risk of loss, especially in relation to the potential reward.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALXA over the next 72 hours.

    Themes: Options Stocks: ALXA
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