Amarin: Some Investment Strategies For 2020

Summary

• In recent news, Amarin's legal brief has been filed, and generic Vascepa has been FDA-approved.
• We covered the legal brief extensively in a number of articles.
• This article discusses some investment strategies for AMRN based on the above developments.
• Looking for more stock ideas like this one? Get them exclusively at The Total Pharma Tracker. Get started today »

Update: The following strategy article was written around 10 days ago and provided to TPT members. Since then, there has been a single significant change - the FDA has approved an ANDA from Hikma, bringing generic competition closer to the market. This news, in its turn, has had two major impacts - one, the stock has fallen briefly, from near $8 to now a little below $7; however, clarity on the legal front, as we showed in our coverage (here, here and here), seems to have helped the options arena turn more active.

We observe significant changes in option price (upto $0.5 for both call and put options) within strike price of $6 & $8. We may assume investors have become more active and are trying to cover their bullish or bearish positions respectively by buying or selling calls and puts around the current market price.

In addition, more December Call and Put options have been initiated between $3 -$5 in the lower side and $10-$15 on the upper side.

In order to reflect these significant changes, we have updated the entire strategy scenario for AMRN.

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Amarin (NASDAQ:AMRN) has a few tumultuous months ahead as the appeal they filed goes through the process. As noted in my previous articles, the timeline is going to be like this:

Source

As we are expecting a judgement in favor of Amarin by late October or early November, we expect remarkable price movement by that time. By considering call and put options dated December 18, 2020, we formulated pay off from different option trading strategies. As we expect the price of AMRN to remain within a range of $3.5 to $18.5 per share, our option trading strategies involve call and put options within a strike price of $3 to $15 (the highest available strike price).

We found that only the vertical bullish spread strategy may provide positive cash flow under any circumstance. However, the cash flow is significantly low, ranging between $0.16 and $1.16. Thus, it does not suit an average investor who'll be more interested to generate profit than to generate a minimal positive cash flow. However, this strategy may be considered by a risk averse person trying to make some earnings without any investment.

If we are reasonably bearish, and don't expect the price to go down below $5.77, then we can surely go for covered call strategy, as it provides good profitability and very low breakeven. As we are quite optimistic of price not nose dipping from the current level, covered call can be opted by bullish investors. However, it has some loss potential in case the judgement goes entirely against Amarin.

With strategies like straddle, strips, or protective put, we are able to generate positive cash flows in case the stock makes significant movement upwards more specifically when it crosses $10, which we also expect to happen. However, the losses expected in adverse scenario (below $10) are quite significant for straddle and strips, whereas it is limited to $0.15 for protective put. Thus, in order to minimize losses while being bullish on the stock, protective put will be the most desired strategy.

Thus, our desired strategy will be a protective put in which we would buy AMRN stock @$6.85 and buy a December put option at $11 per share, at a premium of $4.3.

Covered Call: Buying AMRN stock @$6.85 and writing an AMRN December call option at $15 per share, and at a premium of $1.08, thus having an initial cash outflow of $5.77.

Market Price	Cash Inflow from Stock	Cash Inflow from Option	Cash Outflow	Net Cash Flow
2	2	0	5.77	-3.77
4	4	0	5.77	-1.77
6	6	0	5.77	0.23
8	8	0	5.77	2.23
10	10	0	5.77	4.23
12	12	0	5.77	6.23
14	14	0	5.77	8.23
16	16	-1	5.77	9.23
18	18	-3	5.77	9.23
20	20	-5	5.77	9.23

Click to enlarge

Protective Put: Buying AMRN stock at $6.85 per share, and buying an AMRN December put option at $11 per share at a premium of $4.3, thus having an initial cash outflow of $11.15

Market Price	Cash Inflow from Stock	Cash Inflow from Option	Cash Outflow	Net Cash Flow
2	2	9	11.15	-0.15
4	4	7	11.15	-0.15
6	6	5	11.15	-0.15
8	8	3	11.15	-0.15
10	10	1	11.15	-0.15
12	12	0	11.15	0.85
14	14	0	11.15	2.85
16	16	0	11.15	4.85
18	18	0	11.15	6.85
20	20	0	11.15	8.85

Click to enlarge

Straddle: Buying/Selling a call and put option with the same exercise price and the same expiration date. The maximum loss for a straddle buyer is the option premium in both the options.

e.g. Buying AMRN December call at $6 per share, and buying an AMRN December put option at $6 per share at a premium of $2.85 and $1.65 respectively, thus having an initial cash outflow of $4.5.

Market Price	Cash Inflow from Call	Cash Inflow from Put	Cash Outflow	Net Cash Flow
2	0	4	4.5	-0.5
4	0	2	4.5	-2.5
6	0	0	4.5	-4.5
8	2	0	4.5	-2.5
10	4	0	4.5	-0.5
12	6	0	4.5	1.5
14	8	0	4.5	3.5
16	10	0	4.5	5.5
18	12	0	4.5	7.5
20	14	0	4.5	9.5

Click to enlarge

Strangle: Buying/Selling a call and put option with the different exercise price and the same expiration date. The strike price of call option should be higher than the strike price of put option.

e.g. Buying AMRN December call at $15 per share, and buying an AMRN December put option at $3 per share at a premium of $1.08 and $0.12 (bid price) respectively, thus having an initial cash outflow of $1.2.

Market Price	Cash Inflow from Call	Cash Inflow from Put	Cash Outflow	Net Cash Flow
2	0	1	1.2	-0.2
4	0	0	1.2	-1.2
6	0	0	1.2	-1.2
8	0	0	1.2	-1.2
10	0	0	1.2	-1.2
12	0	0	1.2	-1.2
14	0	0	1.2	-1.2
16	1	0	1.2	-0.2
18	3	0	1.2	1.8
20	5	0	1.2	3.8

Click to enlarge

Butterfly Spread: Buying one call option at higher strike price, buying one call option at a lower strike price, and selling two call options at a same intermediate strike price. The options are of same expiration date, and on same underlying asset. Here, the person is trying to play safe and is neither bullish nor bearish

e.g. Buying AMRN December call at $15 per share, buying AMRN December call at $4 per share and selling two AMRN December call options at $6 per share at a premium of $1.08, $3.97, $5.7 respectively thus having an initial cash inflow of $0.65.

Market Price	Cash Inflow from $4 Call	Cash Inflow from $15 Call	Cash Inflow from $6 Call	Initial Cash Inflow	Net Cash Flow
2	0	0	0	0.65	0.65
4	0	0	0	0.65	0.65
6	2	0	0	0.65	2.65
8	4	0	-4	0.65	0.65
10	6	0	-8	0.65	-1.35
12	8	0	-12	0.65	-3.35
14	10	0	-16	0.65	-5.35
16	12	1	-20	0.65	-6.35
18	14	3	-24	0.65	-6.35

Click to enlarge

Strips: Buying/Selling a call option and two put options with the same exercise price and the same expiration date. The maximum loss for a strip buyer is the option premiums, but here the buyer is more bearish.

e.g. Buying AMRN December call at $5 per share, and buying two AMRN December put option at $5 per share at a premium of $3.45 (bid price) and $1.96 respectively, thus having an initial cash outflow of $5.41.

Market Price	Cash Inflow from Call	Cash Inflow from Put	Cash Outflow	Net Cash Flow
2	0	6	5.41	0.59
4	0	2	5.41	-3.41
6	1	0	5.41	-4.41
8	3	0	5.41	-2.41
10	5	0	5.41	-0.41
12	7	0	5.41	1.59
14	9	0	5.41	3.59
16	11	0	5.41	5.59
18	13	0	5.46	7.59

Click to enlarge

Straps: Buying/Selling two call options and one put option with the same exercise price and the same expiration date. The maximum loss for a strap buyer is the option premiums, but here the buyer is more bullish.

e.g. Buying 2 AMRN December call at $11 per share, and buying one AMRN December put option at $11 per share at a premium of $2.74 and $4.62 respectively, thus having an initial cash outflow of $7.36.

Market Price	Cash Inflow from Call	Cash Inflow from Put	Cash Outflow	Net Cash Flow
2	0	9	7.36	1.64
4	0	7	7.36	-0.36
6	0	5	7.36	-2.36
8	0	3	7.36	-4.36
10	0	1	7.36	-6.36
12	2	0	7.36	-5.36
14	6	0	7.36	-1.36
16	10	0	7.36	2.64
18	14	0	7.36	6.64

Click to enlarge

Vertical Bullish spread: Buying a call option at lower strike price and selling another call option at higher strike price at the same expiration date. Here, the person is expecting the price to go up.

e.g. Buying one AMRN December call at $12 per share, and selling one AMRN December call option at $13 per share at a premium of $1.22 and $1.38 respectively, thus having an initial cash inflow of $0.16.

Market Price	Cash Inflow from $12 Call	Cash Inflow from $13 Call	Cash inflow	Net Cash Flow
2	0	0	0.16	0.16
4	0	0	0.16	0.16
6	0	0	0.16	0.16
8	0	0	0.16	0.16
10	0	0	0.16	0.16
12	0	0	0.16	0.16
14	2	-1	0.16	1.16
16	4	-3	0.16	1.16
18	6	-5	0.16	1.16

Click to enlarge

Vertical Bearish spread: Buying a call option at higher strike price and selling another call option at lower strike price at the same expiration date. Here, the person is expecting the price to go down.

e.g. selling AMRN December call at $10 per share, and buying one AMRN December call option at $11 per share at a premium of $1.8 and $1.37 respectively, thus having an initial cash inflow of $0.43.

Market Price	Cash Inflow from $10 Call	Cash Inflow from $11 Call	Cash Inflow	Net Cash Flow
2	0	0	0.43	0.43
4	0	0	0.43	0.43
6	0	0	0.43	0.43
8	0	0	0.43	0.43
10	0	0	0.43	0.43
12	-2	1	0.43	-0.57
14	-4	3	0.43	-0.57
16	-6	5	0.43	-0.57
18	-8	7	0.43	-0.57

Click to enlarge

Condor Spread: Buying one call option at higher strike price, buying one call option at a lower strike price, and selling two call options at two different intermediate strike price. The options are of same expiration date, and on same underlying asset.

Here, the person is trying to play safe and is neither bullish nor bearish

e.g. Buying AMRN December call at $15 per share and $4 per share and selling September call options at $6 per share and $7 per share, at a premium of $1.08, $3.97, $2.85 and $2.55 respectively, thus having an initial cash inflow of $0.35.

Market Price	Cash Inflow from $15 call	Cash Inflow from $4 call	Cash Inflow from $6Call	Cash Inflow from $7 Call	Initial Cash Inflow	Net Cash Flow
2	0	0	0	0	0.35	0.35
4	0	0	0	0	0.35	0.35
6	0	2	0	0	0.35	2.35
8	0	4	-2	0	0.35	2.35
10	0	6	-4	-3	0.35	-0.65
12	0	8	-6	-5	0.35	-2.65
14	0	10	-8	-7	0.35	-4.65
16	1	12	-10	-9	0.35	-5.65
18	3	14	-12	-11	0.35	-5.65

Click to enlarge

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMRN over the next 72 hours. 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.