Turning Stupidity into Cash - Round 3

This DISCLAIMER applies.

ATHEROGENICS
$15 January '07 PUT
BID: 4.20
ASK: 4.70

As a general rule, with but one exception (Viragen), I would never naked short biotech stocks. There is just no way of knowing who might or might not pull a rabbit out of the hat, regardless of how poorly managed the company's finances might be.

But buying puts has a very different risk profile than naked short selling. Even though both generate gains when the price of the stock in question declines, the puts present investors with the means to manage downside risk to capital. Wiping out with a put is to be expected from time to time and it's not the end of the world if a stock quadruples and the risk capital you commit to a put position disappears. It's a very different... potentially lethal... situation if you're holding a naked short position when a stock does that.

Atherogenics is, financially, in really bad shape. And, of course, there is the prerequisite group of investors out there blaming Atherogenics' problems on... you guessed it... naked short sellers.

So Atherogenics is a logical choice for a put position. However, that premium is pretty rich for a $13 stock. Once again, the smart money in the options pits seem to be telling us something.

We're listening.

POSITION SUMMARY
PRO: One of the ugliest balance sheets I have ever seen for a publicly traded company.
CON: Company has a good two year's worth of working capital. They won't need to raise money any time soon. Also, unlike so many other bogus "development stage" companies, Atherogenics is actually spending their money on R&D. 89% of their operating budget went to R&D over the past three years.