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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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In the Pipeline: Don't miss Derek Lowe's excellent commentary on drug discovery and the pharma industry in general at In the Pipeline

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July 28, 2010

Genzyme: On the Other Hand. . .

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Posted by Derek

In his classic Where Are the Customers' Yachts?, Fred Schwed mentions that the option market can be a good corrective when you're talking yourself into some investment idea. Take a look at it, he says, and you can see how many people are putting their own money down on the proposition that you might be wrong.

Someone's doing just that with the Genzyme takeover speculation, according to the Wall Street Journal. Some trader opened up thousands of option contracts the other day, selling a pile of $75 October call options and opening up a January put spread between 55 and 65. I know that this is gibberish to most people who don't think about this stuff all the time, but what it means is that whoever this is doesn't think that Genzyme is going to make 75 by the end of October (or wants to be protected against the possibility that it won't), and will start to really clean up if the stock starts moving down below 55 again sometime before the end of January.

The options market is a zero-sum game (as opposed to stocks), so whoever this trader is has sold these option contracts to people who think otherwise about Genzyme's probable moves, or to some market maker who's willing to assume the risk for the given price. For any option transaction, eventually someone will be completely right, and the other guy will be completely wrong. We'll see. . .

Comments (1) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. wcw on July 28, 2010 11:20 AM writes...

That article is not written clearly. If you buy a put spread, you are betting the stock goes below the higher strike, but not below the lower. In this case, the trader is funding the volatility cost by selling calls, so the full bet is: definitely not over 75 by October, thereafter probably under 65 but not under 50 by January.

Me, I'd probably just short the calls and buy out-of-the-money puts against them, or short the single-stock future if the bet is purely directional and not also a short of near-term vol.

FD: no position

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