Alexander Valtsev
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Raising Stakes In My Sarepta Therapeutics Trade

My recently recommended trade idea in Sarepta Therapeutics (SRPT) is working just great for two reasons: (1) the strangle is decaying, and I am the seller and (2) the stock is halted on the market due to FDA's pending decision on one of the company's drug (no movement is good, too). The only problem is this: I could not enter the trade because the trade alert was sent on Saturday. In fact, nobody could capitalize on the trade. Nevertheless, once the stock resumes trading tomorrow (hopefully), you can do the following:


Essentially, the key difference between the previous trade and this one is that I suggest selling straddles instead of strangles. It may seem risky at the first sight but bear in mind two things: (1) the straddle is covered (at least to the upside) and (2) the total premium collected from the sale accounts for about 58% of the cost of the stock itself. The break-even price here is more than 30% below the current market price:


As you can see, the maximum return here is the price of the spread received from the options' buyers and the difference between the strike price and the market price of the stock. The downside is capped by zero. The break-even is at $10.60 per share and calculated as the current market price of the stock less the premiums received from the sale of the stock.

Exit Options

The ideal scenario for the stock is to go above $15 per share until April 29, 2016. This way, the trader gets a profit of about $8.80 per share.

If the stock remains roughly at the same level, investors will keep the premiums (about $8.75 per share) and simply sell the stock on Friday before close. This will translate into a ~58% return less transaction fees and taxes.

If the shares start sliding down, set a stop loss at just above $10.60 per share to make sure you break even on the trade in the worst-case scenario. Alternatively, you can buy a put option at a strike of $11, which is going to cost you around $2 per share.

In short, I like the risk-reward ratio in the trade and the current setup. I am waiting for tomorrow to get into this trade.