Option Trading Idea: Cash-Secured Put on Salix Pharmaceuticals (SLXP)

Salix Pharmaceuticals (SLXP) has seen unusual attention of late from stock and option traders. On Monday, the biotech firm reported success from two of its Phase 3 trials for rifaximin, a treatment for irritable bowel syndrome. The company expects to submit a new drug application for rifaximin during the first half of next year.

In the last five trading days alone, SLXP has gained nearly 55% (thanks almost exclusively to a gap higher out of the gate on Monday). Those who want to join in the excitement but take a more conservative approach could consider selling a cash-secured put on the stock. Going out a few months to the January series would allow for a higher premium because of time value but comes with one caveat; SLXP is scheduled to report earnings on or around November 5. In four of its last five earnings reports, however, the company’s results have surpassed analysts’ estimates.

SLXP Cash-Secured Put Trade Details:
*Sell price derived from the bid at the time of publication.

SLXP shares are trading at $19.65

Cash-Secured Put –

• Sell the SLXP January 17.50 put (out-of-the-money) for $2.00 per contract
• Net credit of $2.00 ($200)
• For every contract, set aside $1,550 in cash: [(17.50-2.00) * 100]

Securing the sold put with cash means the capital is available to buy the shares if assigned.

Profit/Loss Details:

The maximum potential profit for this strategy is the premium collected, or $2.00 per contract – minus any commissions paid at the time of the trade’s execution. Remember a cash-secured put that expires worthless will not require any commissions to "exit" the trade.

The maximum risk for this position is $15.50, or the strike price minus the premium collected. Theoretically, this risk is in play if the investor is forced to buy the stock and if SLXP shares were then to decline all the way to zero. With this and all other cash-secured put strategies, the breakeven is also the strike price minus the premium collected, or $15.50 in this trade. SLXP would need to drop more than 20% to breach this breakeven point.

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