We nailed it that ipilimumab has been approved as expected on Mar 26 but I'm more happy for melanoma patients as I know how deadly this disease is and for the past 50 years there has been no new effective drug approved. At least there is some hope now for such patients! Unexpectedly, the FDA even approved the drug beyond what BMS applied for, i.e. a full approval vs a conditional approval for limited late stage patients. Such a positive surprise is always great for the market.
I was in the air on the way back to the US when this news was announced. Of course I didn't know it until I landed late in the evening and I wouldn't have a chance to cash my positions out. If I could act to sell my positions at the peak of BMY prices, I could have pocketed in $5000-$6000 for a 2 weeks trading. I hope you all have acted on it and got some extra cashes. I'd have to work on it next week. If BMY further appreciates, I may get more profits.
You may wonder how much principle I had to put in for this amount of profits. It would be a very large amount of cash if I bought the BMY stock itself, in the range of $50,000. I didn't. To tell you the truth, my principal was close to zero. Yes, right, almost NIL. How could I do that? It would only be possible via options. As I said many times, if options are used appropriately, it can significantly reduce your risk and magnify your profit potential.
I used a synthetic option combo to achieve this goal: low initial principal and large profit margin. Two components involved:
(1) Since I think BMY will appreciate if ipilimumab is approved, I don't think BMY will drop to below $24 in a few weeks. But even if I was wrong and BMY dropped to below $24, I'd be happy to buy the stock at such a low price given BMS is paying 5% dividends and I can also use call option sales to further juice the income and reduce the cost basis over time. So I sold $24 BMY put options expired in Apr. This portion brings me some free money, with which I reduce my cost to buy BMY call options as detailed below.
(2) I then bought BMY $26 call options expired in Apr at the same time. This portion is to bet that the stock will significant appreciate if ipilimumab is approved. Options have the leverage nature. If a stock increases in its price by 10%, its relevant in-the-money call option prices may increase by 50-100%, but you pay much less for options. This is exactly what has happened for my BMY call options. I paid at $0.72 per share and it increased to $1.9 at peak.
When I first set up this combo trade (prior to the Japan earthquake), I still had to pay something as my cost base but just a few hundreds. After the Japan crisis, everything was sold off and BMY was traded at around $25. I took the advantage to add more option positions for the BMS opportunity and it effectively reduced my cost base close to zero. This means I almost paid nothing to set this trade up and the worst scenario for me would be that I had to buy BMY at below $24, for which I would still be happy to do so.
I hope this real life example can increase your interest on options. It is a little bit complicated concept to understand but if you spend some time to study it, I'm sure you will get it straight and master it. It is worth your time and efforts if you really want to be successful in investing. I think you can start with the option basics here.
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