Trade Highlight #3

This time I’ve selected another Short Strangle option combination. It contains BioTechnology, a company presenting study results and subsequently: huge amounts of volatility.

Last week we discussed my second Short Strangle trade on Tesla. If you haven’t seen that post yet you can find it here.

Here is the trade I’ve selected this time:
-C GLS 21 JUN 2019 €130 €1,47
-P GLS 21 JUN 2019 €55 €1,96

All information about this trade can be found at numbers 60&61 via my options page.

So, another Short Strangle huh? I’m sure I’ll manage to put something else in for the next highlight. But as this, slightly older, Short Strangle tells another story I think it might be worth sharing with you. GLS is the ticker of Galapagos, a BioTechnology company. After years of researching, in Q1 of 2019 they ‘had to’ present certain results on the drug that would finally push this company towards positive earnings, after a lot of years! As it was the last week of the quarter and they were yet to present their results, volatility in the shares and option premiums was skyrocketing.

On the 26th of March I decided that these high premiums were great! Whatever would happen with the announcement, positive or negative, the volatility would disappear very quickly once the market would know what was going on with the company. But I realised that BioTech companies can move heavily, especially on news or study results. I opted to go for the widest Short Strangle I could and I placed it a few months out.

Three days after I placed my -P €55 and -C €130, the company showcased their study and it was very positive. The stock price immediately jumped from €85 to €103. This gave me a great opportunity to buy back my put within three days of selling it, for a profit of €164,50 (or 83,93%). At this point, you would assume that my call would be worth more than what I sold it for, the stock price went up after all. However, the market knew what was up with the company and so all the volatility disappeared from the option premium and even though the stock price rose a lot, my call was in the green, I could’ve immediately sold it for another profit, but the profit would’ve been to small in my view.

I decided to stick it out a bit longer. Instead of immediately buying back the call for around €40 of profit, I waited until the 10th of June. At this point I bought back the call with a profit of €140,75 (or 95,75%).

Long story short

I sold a Short Strangle, €55 and €130 on a BioTech company that was about to present huge results that would finally bring the company profitability. Because of the uncertainty in the market the volatility was high and I was about to profit within a few days, no matter which way the stock would’ve moved. I gained a total of €305,25, of which €164,50 was gained within three days of opening the trade.

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

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6 Comments

  1. Thanks for the update. Interesting read again.

    What would your loss have been if GLS rose to, say, €140?

    Also, there’s a minor typo in the blogpost. You said the put was sold at €130 and the call at €55, but I’m pretty sure it should be the other way around ;).

    SD

    • DutchIndependence

      Hi SD, Then my loss would’ve been €1000 minus the option premium that I received in the first place. But I would’ve rolled out the call in that case to avoid any losses and I would wait for the stock price to come down again.

      Thanks for pointing out the error, I fixed it! Have a good weekend!

      DI

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    • DutchIndependence

      Hi Henry,

      Seems like an interesting opportunity! I’ve send you an e-mail!

      DI

  3. This was a really interesting post!
    I think I followed along, haha still trying to wrap my head around more complex trades.

    • DutchIndependence

      Thanks Nate, great to hear! I can imagine that it’s difficult to understand, I remember how I felt while trying to study derivates at first!

      DI

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