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Three Investing Strategies To Play On PTC Therapeutics

As you have noticed, shares of PTC Therapeutics (PTCT) have surged today tremendously:

The stock is up over 43% on the positive news on its nonsense mutation Duchenne muscular dystrophy (nmDMD) treatment, according to To be honest, I do not really care about what caused the surge. What I care about is that call options on this stock have also gained a lot today:

(Source: Google Finance)

When stocks/options become expensive, one typically looks for ways to sell them. Below are given three strategies I came up with while sifting through the options tables on PTC Therapeutics. 

Strategy #1: Butterfly
Despite its quite exotic name, this options strategy is very simple: in investor buys (sells) an in-the-money call (put), sells (buys) two at-the-money calls (puts), and buys (sells) an out-of-money call (put). Typically, the payoff diagrams for this trade look like this:


With this strategy, one's upside/downside is limited. Below we can see a table of estimated returns for May 2016 options:

Note: the above table shows expected returns for a short butterfly with options stroke at $5, $9, and $13 and expiring on May 20, 2016.

This trade results in a cash inflow of ~$176 per contract (equivalent to 100 shares). At expiration, the investor can lose $224 per contract, while the maximum return is limited to the net premium received. In order for the strategy to become profitable, the underlying has to move in excess of 25% in either direction. The last three-month data show that the stock is prone to unexpected volatility, followed by relatively calm periods if time. If you believe that the chance of the stock going 25% in either direction over the next five weeks is low, go ahead and take the opposite side of the trade: get into a long butterfly.

Strategy #2: Iron Condor

This strategy is not new for my frequent readers. In fact, fairly recently I gave an example of this strategy with Valeant Pharmaceuticals (VRX). It has been playing out pretty well since then.

Iron condor and butterfly are similar strategies: they both involve simultaneous buying and selling of options and both have limited risk/return profiles. The main difference with iron condor is that its "middle part" is different: instead of buying/selling two calls (puts), the investor buys an ATM call and put. Essentially, iron condor is a covered call and a covered put bought/sold simultaneously:


In our particular case, we look at May 2016 options. Below the readers can see a table of estimated returns:


Note: the above table shows expected returns for a reverse iron condor with options stroke at $5, $9, $9, and $13 and expiring on May 20, 2016.

With this trade, investors have to lay cash upfront. This is obviously less beneficial than the short butterfly strategy we discussed above. On the other hand, the maximum risk with this strategy is lower, while the maximum return is higher. Notice also that the break-even spread is also narrower indicating that there is a higher chance for the investor to make money with this strategy. The stock "only" needs to move about 24% in either direction by expiration for this strategy to make money. If this sounds a lot to you, initiate an iron condor strategy instead. However, I recommend the long butterfly strategy instead as it promises higher returns at lower risks.

Strategy #3: Covered Call

This strategy is the simplest one of the three. You have probably heard of it many times before. This strategy is designed for long-term investors looking to earn cash on a stock that does not move a lot (or does not rise rapidly in value). If you are willing to hold onto PTC Therapeutics for a year or longer, go ahead and sell out-of-money calls with expiration in January 2017 or later. It is the best time to do that as calls increased in value dramatically today:


Note: the above table shows expected returns for a covered call with options stroke at $13 and expiring on January 20, 2017. Also notice that the downside risk is not depicted on the chart. It is equal to the market price of the stock less the premium received from the sale of the options.

On the one hand, this strategy seems like the most beneficial one the list because it offers the highest return and/or the highest likelihood of success. The risk-return ratio is also better here than in either case. On the other hand, it requires more "downpayment": the investor has to buy the stock first and then sell options against it. This will cost the investor at least $660 per contract (100 shares). In addition, the investor`s capital will be locked up much longer than in the case of the other two strategies. This is exactly why it should be primarily implemented by long-term investor, who would own the stock anyway.

Which strategy would you choose? Are there any interesting options strategies you see with this stock that I missed?