20 December 2006

Reasons To Not Chase Big CC Premium - REVISITED

With Northfield Labs (NFLD) near month implied volatilities at in excess of 200%, Buy-writers have been all over it like a rash, chasing the huge premiums available.

One thing folks forget who chase this type of trade is the risk inherent in this strategy, that's why the IV's are so high.

Well guess what? Northfield (NFLD) is down some 50% in after hours due to some bad news via last nights conference call... and this is IN ADDITION to the 20% whackage during the day.

Now, imagine if a trader had been in (NUVO) and (NFLD) covered calls! That would be two big losses in one week.

Ouch!

{edit} Just wanted to put up a chart of the fun... NFLD 15min including after hours session.

2 comments:

Anonymous said...

Is it your belief that it's a good idea to get involved with these disasters after they blow up ?

W. Anthony Lawrence said...

It's not something I would try to play, but I'm not saying folks shouldn't either.

But something to think about is this; often these companies ae a one trick pony. If the FDA rains on their parade, what have they got? Often nothing. So does that help with analysis, or does it hinder?

The other thing is that in the case of these three companies, the share price is in the $5.00 or less range and the distance between strikes makes it suboptimal to spread.

They're just too difficult to get a good options trade out of now when there are just so many other good trades out there.

Cheers