Biogen (BIIB) had been on a tear the last few months on speculation they were going to get bought out. I sensed that when they announced earnings earlier this week the stock might pop one way or another, but wasn’t sure which way. When we think a stock is going to move but we’re not sure which way then we can put on a straddle, or it’s more aggressive sibling, a strangle. I didn’t get around to putting on a trade since I have only recently learned this strategy and I was nervous trying to put on a trade so close to earnings.

Turns out the stock dropped hard after they announced on Thursday morning before the market’s open that they had not received any bids to be purchased. This caused all of the buyout speculation to wash away for a one-day $17 (approx 22%) drop.

Ok, since hindsight is 20/20 let’s look at how our supposed straddle or strangle migh have worked out for us.

On Wednesday, the day before the announcement, the stock closed at $75.05. A straddle, which buys calls and puts of the same strike price, usually ATM. So on Wednesday an April $75 straddle looked like this:

BIIB April $85 Straddle
Wednesday’s Closing prices
APR 75 Calls - $6.82 for a $682 debit
APR 75 Puts = $5.00 for a $500 debit
Total Debit = $1,182.00

Thursday Late Morning prices
Apr 75 Calls - $1.00 worth $100
Apr 75 Puts - $16.97worth $1,697.00
Total Straddle Value: $1,797.00
Total 1-day Gain: $615.00 or 52%

BIIB April $65/$85 Strangle
Wednesday’s Closing prices
APR 85 Calls - $2.40 for a $240 debit
APR 65 Puts = $1.90 for a $190 debit
Total Debit = $430.00

Thursday Late Morning prices
Apr 85 Calls - $0.30 worth $30.00
Apr 65 Puts - $10.01worth $1,010.00
Total Strangle Value: $1,040.00
Total 1-day Gain: $610.00 or 142%
So while the strangle made as much money as the straddle, the strangle made almost 3 times more money on a percentage basis because we would have risked much less money to get the same dollar return as the straddle.

P.S. I looked at April’s strikes to avoid a volatility crush so close to earnings and to buy some time in case our expected move doesn’t happen and we may want to modify or adjust our trade.