Sunday, August 20, 2006 1:22:21 PM
I figure the current large put position is likely owned by - 1) longs who plan to hold their long positions through the risky FDA decision period but want a hedge (covered puts), or 2) speculators with no stock position who think the FDA news will be negative (naked puts), or possibly 3) as part of some more elaborate hedge fund strategies.
Some of the various ways to play this stock over the next several months include (from most conservative to most aggressive) -
1) No position (the 5 yr CD, chicken little approach :o)
2) Long or short position, completely hedged by protective puts or calls (no risk, but costs you the price of the puts/calls).
3) Long position, partially hedged by protective puts.
4) No position until right after the FDA decision is known, and then going either long or short (the risk here is misjudging the extent of the move / getting the timing wrong).
5) Long position, unhedged.
6) Naked puts or calls (the risk being limited to the cost of the put/call).
7) Short position, partially hedged by protective calls (the degree of the hedge determining the risk).
8) Short position, unhedged (theoretically unlimited potential for loss).
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