NEW YORK (
is slated to announce key data on the company's Duchenne muscular dystrophy (DMD) drug candidate eteplirsen at the International Congress of the World Muscle Society in a late-breaker session on October 13. Recent favorable press, momentum from a string of positive results, and speculation about the possibility of accelerated approval have catapulted the stock from $4 to over $16 per share over the past several weeks. On Sept. 4, Sarepta announced a $40 million at-the-market equity offering; shares subsequently sold off to around $13.
The October options, the expiration nearest to the late breaker session, currently imply an up or down move of around $7 per share (Sarepta could rise to $20 or fall to $6.) Traders wishing to speculate on an upside move face a high-risk proposition by buying equity and holding into the eteplirsen results. Bad data could potentially result in an immediate 50% loss or more on one's initial investment. An alternative (and I believe preferred) approach is to use trade Sarepta and the upcoming eteplirsen data announcement with options.
Try this Sarepta options trade if you want to speculate on the long side:
Sell (10) OCT 7.50 strike Puts at 0.90 = $(900)
Buy 20 OCT 15.0 strike Calls at 2.95 = $5,900
Sell (40) OCT 20.0 strike Calls at 1.75 = $(7,000)
Buy 20 OCT 25.0 strike Calls at 1.05 = $2,100
Initial Trade P&L = $100 Debit
From an execution perspective, this trade should be placed in two separate orders: First the Call Butterfly and then the Put Sale. Trying to complete this trade in one order may not be possible.
This is a very wide strike Call Butterfly near fully financed by a deep out-of-the-money sold Put. The trade results in an initial P&L debit of $100, the initial cost of the trade excluding commissions, and offers the potential to earn up to 100 times on that money. Yes, that's not a typo, the upside on this trade is 100 times the initial investment -- high octane indeed!
At Sarepta shares prices between $15 and $25, the trade is profitable with a maximum profit of nearly $10,000 at $20 per share, which is in-line with the implied upside movement and recent analyst price targets. See the P&L diagram below.
With Saretpa shares between $7.50 and $15, the trade results in a small loss equal to the initial debit, or $100. As we sold a Put to finance the trade, the key risk of this structure is to the downside. Assuming the $7 move in the shares implied by October options is accurate, a downside price for Sarepa shares on negative data could be $6. Under this scenario, losses from the trade I've outlined would be around $1,600. (Please note this is only an estimate and losses could be much bigger.)
Pelz has no position in Sarepta as of the publication this article.
To learn more about using options to trade biotech catalysts, check out Tony Pelz's book,
Tony Pelz was a trader on a major European bank's proprietary trading desk, responsible for a portfolio with limits of more than $200 million. Prior to proprietary trading, Pelz worked with several global investment banks in roles ranging from corporate finance, M&A to credit and business development. He is author of
, co-founder of the small-cap biotech research and trading site
and operator of
. Pelz currently resides in Denver, Colorado where he trades for his own account.