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A Tale of One Epic Arena Pharmaceuticals Trade

Hopeful ARNA option traders win big

by 6/28/2012 9:06 AM
Stocks quoted in this article:

One smart (or lucky) options trader is laughing all the way to the bank as Arena Pharmaceuticals, Inc. (NASDAQ:ARNA - 11.39) rallied nearly 29% on news that weight-loss drug Lorcaserin scored FDA approval. The report sent options players into a frenzy on Wednesday, making ARNA the most heavily traded equity option of the session with 380,000 contracts crossing the tape. In a distant second place was Apple Inc. (NASDAQ:AAPL - 574.50), which saw 300,000 puts and calls change hands.

Volume was spread among a number of strikes, including the weekly 12-strike call (which expires on Friday but saw 17,000 contracts trade on open interest of under 7,000). Also active were the July 12 call, the July 11 put, and the July 12 put. But I'd like to focus on one strike in particular: the July 7 call.

Trade-Alert.com reminded me that this strike came into focus way back on April 24. Back then, average daily option volume on ARNA was roughly one-third of what it is today (26,000 versus 78,000). On that day, a block of 5,000 July 7 calls traded at $0.30 per contract, just shy of the ask price. There hasn't been any notable sell-to-close activity at this strike in subsequent sessions, leading us to believe these call buyers were continuing to hold this position through the FDA decision.

At Wednesday's close, these calls were in-the-money by more than $4 and trading at an ask price of $4.50. That's a gain of $4.20, or 1400%. During the same time period, ARNA shares themselves moved from $2.17 to $11.39, a gain of roughly 425%. Not too shabby for stock holders, but these shrewd option buyers really profited from the benefits of leverage that option buying can provide.

Of course, buying an out-of-the-money call on a pharmaceutical company is akin to swinging for a 600-foot fence. The odds of striking out are much greater, but the home run, while rare, is incredibly impressive.


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