Ariad Pharma (ARIA) call volume jumped to 3X daily average as the August $11 / January 2012 $11 calendar call spread traded 2,500 contracts at $1.20 to open, the trader trying to time the Biotech for a move, looking for shares to stay near the $11 area through August expiration, and then potentially close the spread or let the January calls ride if the outlook is bullish. The spread is show below based on August expiration:
The spread traded as shares hit 5 year highs, although closing modestly lower, and overbought. Shares have tripled since last November, and volume has been strong lately with heavy accumulation. Ariad is a $1.35B Biotech that trades 7.6X sales and has a 10.65% short float. Ariad is in a strong trend, as seen below:
On June 20th, Oppenheimer raised its target to $13 from $11. Lazard reiterated a Buy with a $10 target on June 7th, and shares moved 25% and reached the target already. Lazard noted it expects Ariad to file for approval in the US and EU in 2H11, and forecast approval in the first half of 2012 for Ridaforlimus which has shown strong results, a 28% reduction in risk of progression in sarcoma and endometrial cancer. Lazard also notes that Pantinib in resistance CML is the most promising opportunity for Ariad, and data expected at ASH in December.
It is fairly clear from these event dates why this calendar call spread strategy is well designed, and has the potential to be very profitable as Implied Volatility jumps later this year in anticipation of the events.
The August/January $10 calendar call spread also makes for a solid trade if you see less near term upside, as the IV Skew has the $10 August calls bid up quite a bit. If more bullish, you could try the $12 strike, but regardless, the spread is set up well.
If you prefer not to take directional trades, you could look at the August/January Double Calendar or Diagonal Spread as more of a play on the likelihood of increased volatility later this year.
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