OSIR Cash Secured PUT Trades

Finding high premium options on volatile biopharmaceutical (BP) companies can be very profitable. Of course they are very risky as well. Following a few guidelines can help you mitigate the risk and still receive substantial returns on these types of companies. Recent winners include Dendreon DNDN) Human Genome (HGSI) and if the strategy works again Osiris Therapeutics (OSIR).

BP options premiums are usually at their highest when a clinical study announcement or FDA approval is imminent. In the case of OSIR not only are results imminent but the shares are hard to borrow so the PUT premiums are very high.

When I go into one of these trades I look for the “environmental factors” that can affect the stock while waiting for the announcement. These are earnings release date, mosts BP operate negatively during R&D phases. Available cash or partnership agreements to make sure the company can continue its study and other development activities through clinical trials. I try to find as much information about the product and its current success/failures during prior phases as some indicator to how the current phase may resolve. Phase 3 trials are usually double blind tests so no one really knows until the data is compiled but you can find extenuating conditions, such as severe patient reaction, death or the FDA putting a stop to the trial. I look at volume and steady price increase closer to expected results indicating more analyst expect positive results. I also look at a strike price I am comfortable with buying the stock at which is usually around the 50 or 100-day moving average.

Once I am “risk-satisfied,” Since I am bullish, I start selling PUTS at an acceptable risk/reward premium. For OSIR the Sep 10 PUTS were upwards of $3 when the underlying stock was trading just north of $11. OSIR is now over $14 on increasing volume and result expected any week now. I am break-even if the stock falls to approx $7.

For those more risk averse, as the stock rises the PUT premiums dropped. You can buy-to-close at any time and lock in the profits

Happy Trading...