NEW YORK (
(ZIOP - Get Report) is expected to release top-line data from its phase III trial of palifosfamide for the treatment of metastatic soft tissue sarcoma during the last week of March. I expect the stock to trade down to about $2 per share on negative results and between $5-7 per share on positive data.
Here's an interesting options trade for this important Ziopharm catalyst:
Buy 20 APR 4.0 strike Calls @ 1.40 = $2,800
Sell (20) APR 5.0 strike Calls @ 0.95 = $(1,900)
Sell (20) APR 6.0 strike Calls @ 0.65 = $(1,300)
Buy 20 APR 7.0 strike Calls @ 0.45 = $900
Initial P&L Call Leg = $500 Debit
Sell (10) APR 3.0 strike Puts @ 0.40 = $(400)
Initial Trade P&L = $100 Debit
This is a Call Condor financed almost entirely by a sold Put at a 2x ratio. If one trades aggressively (i.e. trade in between the bid/ask - see my book below on how to do this for illiquid options), it is possible to trade into this structure at zero cost. This trade has a very wide profit zone, between $4 and $7. Maximum profit of $1,900 is achieved between $5 and $6 (see P&L diagram for more detail.)
If we assume the stock trades to $2 on negative data, total loss is equal to $1,100. The stock could trade lower. Assuming these price ranges for potential outcomes, using options provides a superior risk/return to owning a long position in the shares.
One final note: Given the high number of legs in the position, it is important to have access to a cheap options brokerage -- paying too much on commissions using this strategy makes it less economic.
Pelz has no position in ZIOP.
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
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