Buy 10 MAR 5.0 Calls at 0.25 = $250
Initial P&L = $(100) This risk reversal is not standard as it is structured specifically for Dynavax's Heplisav FDA decision. Basically we are selling the January expiration Puts to finance the purchase of March expiration Calls. (An alternative would be to buy two times the number of Calls than sold Puts.) The logic of this structure is that we expect or assume some price support (or potential run-up) into the February decision. Stocks with near-term catalyst often display price support. Assuming the shares trade above $2.50 by January expiration, this trade profits on the Puts, as they would expire worthless. At that point (after January expiration), the trade owns free Calls to benefit risk free from any potential upside thereafter, including a guaranteed profit position of at least $100 regardless of what happens. Downside of this trade is if Dynavax shares for any reason plummet below $2.50 prior to January expiration. The stock had an after-hours print of a bit below $1.70 following the FDA panel vote so that can act as the initial downside risk target for a catastrophic scenario. If the shares trade a bit lower than $2.50 by expiration, we maintain the option to be assigned the shares with a perfect follow-on trade of selling the February 2.5 strike Calls against the long stock position. These expire prior to the Feb. 24 FDA decision date, thus are a great way to play a covered Call. Pelz has no position in Dynavax. 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.