What's everybody's call on AGIX. Check out the call premiums!?

Question

Should I pull the trigger or sit back and watch?

Answer 1

The first response did a good job of explaining the reason for the high option premiums and the what may happen when the results come out. However, there is more to the story.

If you are authorized to sell either naked or cash-secured puts in your account, your should not buy this stock at the market price of $10.47. By taking a synthetic long position with options you can buy the stock for $9.80.

A synthetic long position consists of buying a call option and selling a put option with the same strike price and expiration date. For example, as of today's closing quotes you could buy the April $10 stirke call for $4.80 and sell the April $10 strike put for $5.00. That means you get a $0.20 credit for each pair, before costs. At April expiration, if the stock is below $10 per share, you will be assigned on the short puts and pay $10 per share, less the $0.20 from the options, for a net cost of $9.80 per share. If the stock is above $10.00 per share, you can exercise your calls and buy the stock for $10.00 per share, less the $0.20 from the options, for a net cost of $9.80 per share.

This is a violation of "put-call parity" because by shorting the stock at $10.47 and taking a synthetic long you have a "risk free" profit or $0.67 per share. Since market makers to not stay in business by giving money away, the you can be sure that you cannot sell the stock short. You can, however, effectively buy it for $9.80 per share.

I have no opinion if the stock is more likely to go up or down, and I am not recommending anyone create a synthetic long position unless they have already decided they want to buy to stock.

Answer 2

My thinking is it will either be a big winner or a big loser. If the results of the phase III trial for AGI-1067 (which are due to be announced this month) are good, I expect the stock to take off higher. I'm thinking double or triple, but based on the calls, there are others that think much more than that. On the other hand, if the results are not good, I'm expecting the stock price to be cut in half...at least. I see this as a high-potential, high-risk stock right now. I would not invest any money I couldn't afford to lose.