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HGSI Synthetic Convertible - The Perfect Trade (In Jeopardy?)

|Includes: AFFY, DNDN, GlaxoSmithKline (GSK), JPM, VVUS

On Friday afternoon the FDA released notice that they were now delaying for 3 months their ruling on the approval of HGSI's lupus drug.   From my standpoint the approval or non-approval is not important.   What is important to me is the actual "event".    The "Perfect Trade" is somewhat hinged on the event itself and in no way reliant on the actual yes/no approval.    So does the delay itself actually derail the perfect trade?   The answer in short is "No".  

Please remember that we set the "Perfect Trade" in the following manner.
     Long 10 December $23 Calls ($2.80)
     Short 700 Shares HGSI ($24.90)
     Short 5 December $22 Puts ($0.75)

So let's retrace and analyze the options that we have at this point.    With the announcement of the delay in the FDA approval shares of HGSI immediately plummeted and it looked as though the market was adjusting the price accordingly.   Today however the price rebounding and at one point was actually higher but could not hang on and finished down for the down (HGSI $25.27).  

So let's assume that the price stays at this level - what does that do to our perfect trade?   We will still reap the $375 put premium regardless of the finishing price of HGSI.   If the price of HGSI were to stay at these levels we would lose the time value ($0.90) of the call options however would retain the intrinsic value by converting the calls to shares.   We could have the respective profit/loss from the short sale position.   

At today's closing price of $25.27, our "Perfect Trade" is essentially a draw.   If the options were to expire today we would have a losing position of ($414).  

At this point I think that it is still best to ride this trade out and capture some gamma from trading HGSI as the hedge against the call.   We have found the "worst case scenario creates a very small loss with essentially no gain.   At this point we can actively trade HGSI to make up the small loss on the options.

synconvertguy.blogspot.com
 



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.