Disclaimer: high risk play similar in every aspect to an Earnings event.
Reata $RETA is a pharma company in the CNS space, currently waiting for PDUFA approval from FDA, expected before 28th February.
The CNS is a particularly difficult space for biotech to get FDA positive news.
- In fact, after some research, knowledgeable scientists put the odds for $RETA on a 60/40 , basically a binary event, reflected by extreme high IV. Issues on $RETA arise by its cardiotoxicity.
I must add that this is a delayed PDUFA, in those cases the success rate grows historically to 70/30 .
Also, I must add that discussions are being held on a possible FDA shift of policy regarding CNS, meaning more drugs in this space receiving green light.
I would place a bet at 40% odds if well rewarded. Well, this seems to be the case.
Let's see.
2) First of all, the option chain is bearish, meaning market is expecting bad news.
3) This also means that the bull case is less liquid = spreads are bigger = puts are cheaper than calls.
4) $RETA is currently trading $48.83
Where should it go in both cases ? And will be the bull case rewarded as the bear case ?
BEAR CASE = PUTS
$RETA has cash only for the equivalent of 10$ / share. And that's where the stock price is gonna end in these cases. This means ~ 39 points drop.
Not a case you see everyday !
The image refers to the simulated (Theoretical options price on Thinkorswim ) value of the puts after a 38.83 points drop, precisely on the 28th February. If the news come before 28th, the values will be even bigger.
Suggested strike : 5 PUTS MAR17 for an upside of …
23x = 2300 %
Every $100 should give you $ 2220 .
Net of invested sum and net of commissions.
As you can see, 1 put costs 5$ (+commissions to your broker).
BULL CASE = CALLS
I need to add that the upside potential is much less clear than then downside.
RETA could very well explode to 100 or more.
Let's see the 89 stock price here.
We start to see the effect of illiquidity and the huge spreads. Hoping to be able getting filled at the mid (while on puts we hit the ask, certain to get a fill) , the best strike would be
75 CALL MAR17 .
Minimum capital required ~ $ 450
Upside : 6.7x = 670 % . $ 2550 net.
Taking the bull side, for the same upside value rounded to 40 points, doesn't pay that much .
And requires much more capital invested.
If we spent that minimum amount on puts and we took into account the probability of success,
for both cases, what would be the results ?
60/40 : 3996 vs 1530
70/30 : 2997 vs 1785
This encompasses how much better would puts be paid, in case of successful bet.
TLDR : $RETA 5 PUTS MAR17 for the glory 🙂
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