Week of April 12, 2010
If it’s Monday, CST’s Options Director Dan Keegan must have another Pharmaceutical play. It could be because his Father was a doctor, or maybe it’s because the pharmaceutical sector is where all the volatility is, but Dan has been finding volatility with the VIX at ridiculously low levels (15.67 opening this morning). So pay attention and maybe Dan will come up with something to help pay your taxes.
On Friday, February 26th, 2010 OSI Pharmaceuticals, Inc (Public, NASDAQ:OSIP) closed at 37.02. The following Monday, March 1st, OSIP opened at 55.11 and closed the day at 56.25. The source of this upsurge was the hostile takeover bid by the Tokyo based pharmaceutical giant, Astellas Pharma for $52 a share. By the close of trading last Friday April 9th, OSIP was at 60.06. The market seems to be saying that Astellas either has to raise its bid or there are other suitors waiting in the wing for OSIP. If you look ahead to the bid-ask spreads in the January, 2011 and the January, 2012 OSIP 60 Call options, they are more than 1.00 apart. In the world of options, that indicates that nobody wants to take a position that far away from expiration and that taking any positions in those markets would be costly.
The July-May (2010) 60 Call time spread or the May (2010) 60 straddle are trades that are more reasonable ways to take advantage of OSIP’s volatility. The time spread, which can be purchased at 1.15, should become more profitable as the rumors stay alive. The OSIP May 60 straddle could probably be picked up for 3.40. That position is a winner if OSIP goes below 56.60 or above 63.40, and with an implied volatility of 21.0 that’s not a bad bet.
If the deal falls apart there almost certainly would be downward movement greater than 3.40 and if the deal goes through at a higher price than 63.40 the position would be a winner on the upside. However, if a cash deal is struck at 60.0 anytime soon then obviously the long straddle and the long time spread would be losers.
To really get the most from Dan’s expertise, take our options course and maybe you will be to find volatility in non-volatile market
