As an options trader, I’m biased to using options versus buying stock when putting on positions. And yesterday after the market close, there was a stock event that illustrates that in some cases, there should be no debate whether to buy options or buy the stock.
Aerie Pharmaceuticals (AERI) has been loved by many traders over the last couple of years. The stock is up 233% over the last three years and up 21% year to date. The chart looks great and momentum traders have been piling into the stock without much fear.
However, options traders and others who follow the company knew that a big event was coming. With the stock trading at 35 yesterday, the at-the-money straddle in AERI was pricing a move of $7.50 this month--flashing all types of warning signs to the downside or the upside.
Knowing that risk, let’s say I wanted to be long 500 shares of AERI via stock or options. To be long 500 shares of AERI would have cost me $17,500. To be potentially long 500 shares via options, I could have bought five May 35 calls for $4.00--a capital outlay of $2,000.
Last night, it was announced that the company’s experimental eye drop failed a late-stage test and the stock fell by over 70%, trading as low as 10. This is a crushing blow for stockholders, but a minor hit for option holders.
While options are not always the better use of capital versus the purchase of the stock, in the case of biotechnology events in which the stock could be up or down 25%-75%, I can’t imagine why using options wouldn’t be the preferred method of investing.