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Two new put candidates

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September 29, 2010 – Comments (18) | RELATED TICKERS: CORT , ONCY

Corcept (CORT) - I'll try and be concise here. Corcept is expecting topline results from the phase III trial of wonder drug Corlux in Cushing's syndrome in December. Corlux is a wonder drug because it has single-handedly kept Corcept's share price afloat for years despite a complete and utter lack of success in late stage trials. Corlux has failed three phase III trials for psychotic depression which has not stopped the company from attempting to enroll a fourth phase III trial (still enrolling 2.5 years later). Corlux was then advanced for mitigation of antipsychotic-induced weight gain but proof-of-concept data was unimpressive. So Cushing's is the latest in a series of indications for the company's solitary compound in advanced development. Corcept has been diluting heavily this year indicating to me a lack of confidence in their phase III results. The share price is up nearly 50% over the last month despite an absence of positive catalysts, which is suggestive of a Bottle Imp pattern developing. According to Yahoo Finance, there are no puts currently available with an expiration in 2011 but I will be watching for these closely as I believe the likelihood of positive results in Decmber is less than 30%. Negative results should drop the market cap close to cash, from above a share price of 4 to well below 1.

Questions for the options experts - if no puts are shown on Yahoo Finance, does it mean for sure none are available? How do options markets develop when none currently exist? Is selling naked calls a reasonable alternative to buying puts?

Oncolytics (ONCY) - another share price on a tear here without positive catalysts and only one compound in advanced development. There's no binary event in the immediate future, just a 300M market cap that seems wildly disproportionate to the long-term prospects of unproven anti-cancer agent Reolysin and a cash position of 24M. Ultralong has piled on the underperform side which adds a measure of confidence here. A deep expiration date seems appropriate and the bid/ask on March 2011 2.5 strikes is 0.10/0.40.

Question for the options experts - what's the best way to play a huge bid/ask spread like this? It would seem strange for me to buy something for 40 cents that I couldn't sell for more than 10 cents immediately afterwards. So do I enter a limit buy for 10 cents? Or something between 10 and 40 cents? What should I expect to sell this option at if I already own it?

 

 

 

18 Comments – Post Your Own

#1) On September 29, 2010 at 1:54 PM, stevenscreen (56.23) wrote:

ZZ, To answer your question on how to play really depends on how much lower then 2.5 you think it will go. Let me know and I can let you know how I would personally play it (I have been trading options for 9 years).

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#2) On September 29, 2010 at 2:17 PM, zzlangerhans (99.75) wrote:

Actually, I don't think ONCY will necessarily go below 2.5 before March. But if the share price drops from 5 back down to 3 within a month or two I should be able to sell those puts at a profit. I'd prefer to buy my puts in the money, but they don't seem to exist at the moment. For the sake of argument, do you have any answer to the question about the spread?

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#3) On September 29, 2010 at 2:37 PM, TMFBiologyFool (96.87) wrote:

Selling naked calls isn't a reasonable alternative to buying puts (for you) since you said in an earlier post you were opposed to losing more than your original investment and selling naked calls has an unlimited downside.

If there were two strike prices available, you could however set up a bear call spread (sell the lower one and buy the upper one as protection). Then your loss is limited to the difference between the strike prices and the maximum gain is whatever you sold the call spread for.

I'm not sure I agree with your 30% success rate on Corlux for Cushing's only because I have no idea what it could be. It seems investors are going in to the phase 3 trial completely blind.

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#4) On September 29, 2010 at 2:40 PM, stevenscreen (56.23) wrote:

I would personally only try to get filled at the bid with a spread like that seeing as you dont believe it will go below 2.5, if you felt it would go below 2.1 by that point getting filled at .4 is profitable at this juncture. 

The problem with you not thinking it will go below 2.5 before March is even if you buy it at .1 you will probably never get enough activity in the option to cover it at a profit. With an open interest of 20 there is not much liquidity in the option which would leave it subjected to the forces of the inherint value of the option which is close to 0. Personally I would buy the 7.5's as they are trading at fair value and will give you the best bang for your buck (Only if you could get filled at the bid as the current theoretical value using the 6 month volatility is 2.84 with a bid ask of 2.85 3.5)

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#5) On September 29, 2010 at 3:01 PM, portefeuille (99.60) wrote:

According to Yahoo Finance, there are no puts currently available with an expiration in 2011

CORCEPT THERAPEUTICS INC COM FEB-11 $2.50 PUT (CORT Feb 19 '11 $2.50 Put)

CORCEPT THERAPEUTICS INC COM FEB-11 $5.00 PUT (CORT Feb 19 '11 $5 Put)

CORCEPT THERAPEUTICS INC COM FEB-11 $7.50 PUT (CORT Feb 19 '11 $7.50 Put)

CORCEPT THERAPEUTICS INC COM MAY-11 $2.50 PUT (CORT May 21 '11 $2.50 Put)

CORCEPT THERAPEUTICS INC COM MAY-11 $5.00 PUT (CORT May 21 '11 $5 Put)

CORCEPT THERAPEUTICS INC COM MAY-11 $7.50 PUT (CORT May 21 '11 $7.50 Put)

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#6) On September 29, 2010 at 3:04 PM, portefeuille (99.60) wrote:

Questions for the options experts - if no puts are shown on Yahoo Finance, does it mean for sure none are available?

no, hehe ...

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#7) On September 29, 2010 at 3:33 PM, portefeuille (99.60) wrote:

It would seem strange for me to buy something for 40 cents that I couldn't sell for more than 10 cents immediately afterwards.

You could use an options calculator to see whether the implied volatility is "reasonable".

http://www.blobek.com/black-scholes.html

entering the values

Strike price: 2.5

Share price: 4.83 

Time to expiration (days): 171 (09/29/10 - 03/19/11)

Volatility (%): 132

Annual interest rate (%): 0.3

and hitting one of the "caluculate ..." buttons yields an options price (using the "Black-Scholes formula" of around 0.40 USD.

entering

Volatility (%): 79

yields an options price of around 0.10 USD.

Usually the "ask price" is more "reasonable" than the bid price. An implied volatility of 132% appears to be "about right" (you can compare options for "similarly volatile" ("forward looking") stocks ).

 

 

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#8) On September 29, 2010 at 3:35 PM, portefeuille (99.60) wrote:

"caluculate ..."

"compute ..."

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#9) On September 29, 2010 at 3:37 PM, portefeuille (99.60) wrote:

I would personally only try to get filled at the bid

It is highly unlikely you will get any "close to the bid". You could of course raise your limit in small steps starting from there ...

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#10) On September 29, 2010 at 3:38 PM, portefeuille (99.60) wrote:

It would seem strange for me to buy something for 40 cents that I couldn't sell for more than 10 cents immediately afterwards.

such is life in the "options market" ...

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#11) On September 29, 2010 at 3:39 PM, portefeuille (99.60) wrote:

I am not an options expert of course ...

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#12) On September 29, 2010 at 3:53 PM, stevenscreen (56.23) wrote:

It is not likely that you will get filled at .1, but it does happen. The problem with buying at .4 at this point is examining the movement you will get out of a two dollar move. With such an illiquid option you will typically see the bid and ask fluctuate but no transactions ever happen unless you meet the bid or the ask ( This happend to me in quite few instances).

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#13) On September 29, 2010 at 4:02 PM, zzlangerhans (99.75) wrote:

Port, how did you access those option quotes on Yahoo Finance? I tried it on two different computers and the Puts were blank in 2011. Of course, your links work. I can see the quotes on Google Finance though. Maybe it's time to abandon the sinking Yahoo ship.

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#14) On September 29, 2010 at 4:04 PM, portefeuille (99.60) wrote:

You could of course raise your limit in small steps starting from there ...

And you should do it that way. No reason to "test" the lower prices first.

I usually do something like this.

buy 10 limit 0.1
wait 10 minutes or so
if no fill, chnage limit to 0.15
wait ... change ... wait ...
once you get a fill of a partial fill and you "like the price" oreder a few more at that price.

not sure what the other side thinks about my "amateur fishing strategy", but I would just hate paying "far too much" ...

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#15) On September 29, 2010 at 4:08 PM, portefeuille (99.60) wrote:

I found them using my "online brokerage platform". They are invisible on a computer sitting in Germany as well. Maybe just a bug, but I don't usually "trust" yahoo finance data as I find errors every now and then ...

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#16) On September 29, 2010 at 4:09 PM, portefeuille (99.60) wrote:

No reason to "test"

No reason not to "test"

 

sorry for all the errors.

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#17) On September 29, 2010 at 4:13 PM, stevenscreen (56.23) wrote:

I agree port and that is how I go about it, but to not at least try to get filled at the bid I dont see why not. In this case I would of put a max value that I would pay for those options at .25 (the time value of the option). Then follow ports suggestion and just dont chase the ask and you should be fine.

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#18) On October 01, 2010 at 1:30 PM, dnblack (79.07) wrote:

I follow pretty much the same strategy as port and steve for those large spreads, I'm glad to hear some reaffirmation.

I think a good rule of thumb for baby biotechs is: never sell naked calls.  At least that is the one I abide by.  One potential alternative (that I would also never do) is a covered put, which could do the following:

-Increase your chances of a breakeven compared to straight shorting.

-Allow you to set a lower limit that you believe the stock will not drop below.

-Allow you to take the correct side on a big bid-ask spread.

-Allow you to take advantage of high implied volatility relative to historic norms by selling instead of buying options (though this is also true for selling naked calls).

-Result in unlimited losses and slowly bleed money in the carrying costs of the short.

For reference, here are the implied volatilities of CORT and ONCY based on the 25 delta calls.  Averages are based on the 25 delta calls for the last 6 months.

ONCY - current: 91%, average:  ~120% (good candidate for buying options)

CORT - current: 135%, average: ??? (I'm not sure when the CBOE started listing options for this one, and I can't find good historical data).

Additionally I feel like since I steal so many of your ideas I should probably point out that ARNA Nov 1.00 puts are trading at $0.05 with a potential upside to ~$0.30 if Lorcaserin/Lorgess fails and ARNA drops to its book value of around $0.68/share.  I could even see these trading as high as $0.15 prior to Oct. 22 just due to increased demand and a big volatility skew leading up to the announcement.  I bought 40 of them just to test the theory.  Commissions are brutal at those prices so I do hope the drug fails :).

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