Tuesday, December 7, 2010

OREX - Creating the Reverse Synthetic Convertible.

OREX's Contrave is set to be heard today by another FDA panel to discuss the drug's efficacy.
December 7, 2010 Endocrinologic and Metabolic Drugs Advisory Committee
Meeting - Webcast Information

The FDA plans to provide a live webcast of the December 7, 2010 meeting of the
Endocrinologic and Metabolic Drugs Advisory Committee.

Please note that the webcast will not display until the meeting begins at 8:00 a.m. EST on
December 7, 2010.

The webcast can be accessed here: https://collaboration.fda.gov/emdac/

I previously created a new design on the synthetic convertible that is an ideal play for this type of trade.    Again, necessity is the mother of all invention because my broker would not allow me to short OREX so I was forced to create the reverse synthetic convertible.

The reverse synthetic convertible is essentially the same play with OTC options with a long position in the stock versus a short.   This allows us to bypass the fact that we may not be able to short some stocks or ETF's and can also allow you to use your IRA to create some positions.   So let's create the trade from here.

We know that some volatility has been created with this news so it makes a great play  for my strategy.   So here is the trade (Reverse Synthetic Convertible)
     Short 20 Jan 11 OREX $7.50 Calls ($1.75 Avg)
     Long 1,000 OREX Stock ($5.43 Avg.)
     Long 7 Dec. OREX $3 Puts ($0.55 Avg.)

These trades were initiated on and around the 19th of November so the prices are somewhat different than today's information.    As you will also notice the difference in the Reverse and the normal Synthetic Convertible is simply the reverse of the original trade.   This makes complete sense because again remember that we are creating a new instrument and reversing the trades creates the same profile just in a different format.    The only changes that I have made to the original trades were sells of my original long (around 1,200 shares) to correspond with the appropriate delta on the call.   These trades allow me to create a better hedge and be in a better position when the event comes along.


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