Bought to open ENDP covered call (6/24/16 expiration, $15 strike)


Bought to open 1,000 shares of ENDP at $15.35, and sold to open 10 call contracts with $15 strike price, expiring 6/24/16, at $0.65. Total cost including commission is $14,723.4, or $14.7234/share.


tl;dr: This is a boring trade that will most likely (85% chance) end with a slight profit. The probability of it becoming really worthwhile is about 10%. Then there’s a 5% risk of a significant loss.

Long version:

The stock of this generic drug company lost more than 4% today, as the biotech sector massively underperformed the overall market (XBI -1.8%, vs. SPY +0.3%). Other biotechs lost more, but ENDP offers two distinct advantages:

First, the stock closed at $15.40, today, less than $3 above its 2016 (and 13 year!) low of $12.56, and more than $45 off its 2016 high of $61.14. On a price/sales basis, ENDP is at its lowest valuation in this millennium:

P/S ratio for ENDP, from GuruFocus.comP/S ratio for ENDP, from

The second attractive feature of ENDP has to do with the fact that a stock being cheap offers no guarantee that it won’t get cheaper, still: I am looking for an added margin of safety, which can be obtained by selling call options against long stock. ENDP offers those at weekly expirations with convenient strike prices and richly priced implied volatility (IV of 77%, IVP 60%, HV 67%, HVP 31% — all for a 30 day horizon).

Given the premium collected, there is no risk if ENDP goes up; the position would simply get closed at a slight profit. The downside is protected to $14.73. The risk of ENDP falling more than the requisite 4.4% by the end of the week to take out that break-even level is less than 15%. I would put the risk of the stock falling enough to force me out of the trade prematurely (around $14.00) at about 5%.

My ideal scenario would envision the stock closing the week around $15, giving me the opportunity to continnue to sell volatility in this name.

June 21, 2016 at 1:12pm · ENDP · buy to open · covered call

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