Sell (30) JAN13 2.5 strike Calls @ 0.25 = $(750)
Initial Trade P&L = $(50) Credit P&L Diagram: In this trade, I am buying Puts fully financed by selling a higher ratio of Calls. The trade can be done for a small credit of $50 excluding commissions. This structure allows the premium decay in the long Puts to be offset by the premium decay in the short Calls -- it thus protects against the situation where the stock trades around $1 for extended periods of time. It also provides immediate and increasing profit at all points below $1 (where buying the $1 strike Puts outright needed the shares to trade to 65 cents just to break even.) Due to the enormous challenges Peregrine faces, I don't see the shares trading above $2.50 by January expiration, hence I am willing to sell those Calls at a higher ratio. The risk in the trade is that it includes naked Calls (the Calls that were sold) -- this needs to be understood as it is very important from a risk perspective. If Peregrine shares trade higher than $2.50 by the January 13 expiration, this trade loses money. Losses in this trade could be enormous if Peregrine shares trade to recent highs of $5, but this is a very low-probability scenario given recent events. Pelz has no position in Peregrine. To learn more about using options to trade biotech stocks, check out Tony Pelz's book, The Biotech Trader Handbook or subscribe to Chimera Research Group.