Buy 10 DEC 5.0 strike Calls @ 0.60 = $600
Initial Trade P&L = $950 Debit This is a bullish DEC 4/5 strangle with a total risk of $950 should Exelixis trade between $4 and $5 by expiration. Regardless of stock price direction, I expect (implied) volatility to increase substantially from current levels -- from 95 to 180 (feel free to ridicule me if I am wrong.) This expected increase in volatility should by itself provide 10-20% upside in the premium by the FDA decision date -- thus there is some embedded optionality in the trade structure should I decide to exit the trade the day prior to Nov. 29. If I hold through that date, I need the stock to increase or decrease by 95 cents above or below the $5 strike Call or the $4 strike Put. Thus, the trade's breakeven points are $5.95 or $3.05 by DEC expiration on Dec. 22. Pelz has no position in Exelixis. 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.