ITMN Options Madness!

• Posted by Adam Warner
• on March 5th, 2010

So how about this Intermune (ITMN) for some volatility? Nothing like a small biotech with news pending to get those premiums flowing. Here’s what’s up in ITMN, via TheStreet.

FDA advisory panel meets to discuss InterMune’s …pirfenidone for the treatment of idiopathic pulmonary fibrosis. The FDA’s briefing documents for this meeting likely available on March 5 or March 8.

With the stock near $14.50, the March 15 straddle is trading for about $8.75. Or if you prefer, the March 10-20 Strangle goes for about $4.10.

It’s always tempting to close your eyes and sell a small quantity of some paper, and given the choice I’d pick the strangle. But alas, it’s likely the wrong approach. News like this is completely binary for a small biotech. In other words, ITMN will probably double or halve.

Instead, I’d look to either sell a really wide Condor, or buy a really tight one. It’s not easy to leg, so probably won’t trade it, but let’s say you buy the March 14-11 put spread for $1.50 vs. buying the March 16-19 call spread for $1.10. That’s $2.60, which is enormous when you consider both sides are OTM now and it can only max out at $3. But here’s the thing, it almost certainly will max out, you’re only real risk is that they delay the news for some reason until after options expiration.

Sounds like a wacky spread, but the concept usually works. But it’s certainly reasonable to hate the idea. So here’s another one. Sell really wide condors. You can get roughly $1.10 if you short the $22.50-$25 call spread in combo with the $7.50-$5 put spread. If ITMN doesn’t quite halve, or doesn’t quite double, you’re a winner. Plus you really win on the outlier event of a news delay.

 

Update 9:13AM Guess this is all now yesterday’s news. ITM up $12. This same story plays out in every small biotech.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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