Call “Stupid” in AVNR

For the second time this week, we see heavy call buying in a pharmaceutical name. Avanir Pharmaceuticals (Nasdaq: AVNR, $3.97, up $0.13) specializes in developing medication for the treatment of neurological disorders including Alzheimer’s and Parkinson’s, and has several products in Phases II and III of FDA testing.

AVNR at $3.97 trades 2.5 million shares per day on average, and has been in a 52-week range of $2.60 – $6.00.  Shares are up 20% year to date in 2014, and at least one trader is convinced there is plenty more room to the upside.  Biopharmaceutical stocks are typically more highly susceptible to news and announcements than other companies, and it is possible the upside call buyer seen Wednesday morning has expectations pending good news.

A trader came in this morning and bought large blocks of calls in the April and June 4 lines, a Stupid.

(Editors Note:  A “Stupid” is one of the best-named terms used by traders to identify a type of trade.  In this case, a trader bought a “Call Stupid”, by buying April AND June 4 strike calls.  Another Stupid we saw this morning was a customer buying 10,000 VIX March 18 – 22 stupids, buying 10k of each strike).

The trader bought 6,400 AVNR April 4 Strike Calls for $0.73.  Potentially controlling 640,000 shares, this $467,200 investment will be profitable if the stock is trading above $4.73 at April expiration (4/17).  This means AVNR must rise over 19% for the trader to break-even at expiration.  The ANVR April 4 Calls are currently $1.00 – $1.05, meaning this individual is already up over 30% on their investment.

This same trader also purchased 7,100 AVNR June 4 Calls for $1.20.  With $850,000 risk in total and the potential to control 710,000 shares, this investment will be profitable if AVNR is trading above $5.20 at June expiration.  This would require the stock to move up nearly 31%.  The AVNR June 4 Calls are $1.30 – $1.35, with the trader being up a more modest 10% in this line.

So time will tell if this trade was “Stupid” or not, but the type of trade (buying two different strikes) and the size of the trade bear watching.    JV  &  AK