Orexigen (OREX) - updates on diet pill development creates chubby trading opportunity

Orexigen (OREX) was 1 of the 3 companies racing to obtain FDA's approval for the first new diet pill in more than a decade.  The company's obesity drug, Contrave (a bupropion and naltrexone combo drug), eventually received a Complete Response Letter (CRL) from the US drug regulator on Feb 1 of this year due to safety concerns.  The news sent the stock down more than 70%, which in turn boosted the price of my put options ~300% overnight.  At the time, I devised 3 option strategies with various levels of risk for all types of investors who all profited from OREX's anticipated fall.

The diet pill-developing company will be holding a conference call before regular hour trading this Friday (June 3), discussing plans to further Contrave's development.  This announcement encouraged investors to jump in, helping OREX to surge more than 18% by market closing today.  I believe this is a perfect opportunity to play the downside of OREX by purchasing put options.  Back in February, FDA requested Orexigen to conduct additional clinical trials, of sufficient size and duration, to properly assess Contrave's safety.  This is NOT an easy and quick request to fulfill - it may take 2-3 years or even longer to complete the requested human study, which may or may not yield positive results.  Here is a great analysis of OREX's CRL.  Based on FDA's guidance, I believe OREX will NOT provide any exciting/useful information that will sustain the pre-conference call hype.  I will be looking into buying June or July $3.5 puts, expecting OREX to drop down to the $2.80 level after the conference call.

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