Here's a trade that you might want to consider watching...

The company is TELIK INC. (TELK) - another small biotech with Phase III trial results coming out this month.  Premiums on the options are pretty high, and without knowing the date of the news release, I'm not looking at it for a straddle or strangle.  Instead, I'm considering a buy / write.  As with most small biotech with their first product completing Phase III trials, the risk / reward ratio is pretty high so caution is recommended.  Here are the numbers on the play:

TELK - January Covered Calls                                                

Stock Price:      $17.27                                               

Option Strike Price       $25.00     $22.50     $20.00     $17.50     $15.00

Option Bid Price             $2.20      $2.65       $3.40       $4.30       $5.40

Adjusted Entry Price       $15.07    $14.62     $13.87      $12.97     $11.87

Income %                       12.74%   15.34%   19.69%     24.90%    31.27%

Income Called Out $      $9.93       $7.88      $6.13       $4.53        $3.13

ROI Called Out %          65.89%   53.90%    44.20%    34.93%    26.37%

Downside Price Tgt      $11.00  

At risk $                       $4.07       $3.62       $2.87       $1.97        $0.87

At risk %                         37.00%    32.91%    26.09%    17.91%      7.91%

Risk / Reward Ratio      41.99%    47.21%    48.45%    45.70%     30.99%

I estimated the downside price target based on an expected drop of almost 60% if the Phase III trial results are not positive, however looking at the chart, there appears to be several support levels that it could rest at - the strongest support level appears to be ~$15 - so I feel that $11 is a very conservative estimate for downside risk.  The amount that I calculated for "At Risk" is based on the drop of the stock price only... should probably add another 10c to allow for closing out the calls in order to sell the stock to cut losses.

The upside if the Phase III results are positive is at least $25 (IMO) so good results will position this trade to be called out in January.

Personally, I like the January $25 strike for this play.  The premium is pretty good, and the ROI is very very good if called out.  Also, the risk to reward ratio shows that it is only about 11% more risky than selling ITM calls, while the ROI is potentially 2.5 times higher.  Another reason that I like the $25 strike is that if the news is bad, these options will lose value almost immediately.  This will make them cheaper to buy back quickly as part of my exit strategy if the news is negative.

WIth new covered calls, I always ask myself whether or not I would like to own this stock if its not called away from me.  In this case, I can say "yes" if the news is good... but if the news is bad I need to have an exit plan.  The exit plan in this case is pretty straight forward - it is completely news-driven.  If the news is bad, buy back the covered calls and close the long stock position.  If the news is good, hold the position up to expiration and decide at that point if it is worthwhile to use a spread trade to extend the overall position for another month and higher profits.

Good luck!

AA