TL;DR
- Biotech binary events can trigger 30-300% moves overnight.
- Sell calls before FDA dates to pocket fat premium, then decide if you want to keep the shares.
- Use weekly calls one to three weeks out, strike 5-10% above the current price, for a 2-5% instant cash-flow.
- Have a circuit breaker: close the trade early if the option value collapses to 25-50% of what you collected.
I still remember the Sunday night in March 2020 when I placed a short weekly call against a mid-cap biotech name I had been holding since the previous November. Monday morning the FDA issued a Complete Response Letter instead of an approval. The stock gapped down 68 % before I could even pour coffee. Because I had taken in a fat premium the Friday before, my effective cost basis was under the gap-down low. I walked away with a small gain instead of a six-figure hole.
That trade became a template for handling every biotech binary event since. Today I will walk you through the exact rules I now teach inside our covered-call program. The setup works whether you own the stock already or you are eyeing a new position ahead of a catalyst.
What a Binary Event Actually Means for Price
Biotech companies live or die on a single PDF file released by the FDA or an EMA committee. Approval can send a sub-$10 stock to $40 overnight, while a rejection can take the same ticker to $2. Implied volatility routinely spikes above 100 % heading into the decision, which pushes option premiums through the roof. That premium is your edge.
My rule: if the straddle (put plus call at the same strike) is priced at 25 % or more of the stock price, the market is pricing in a move at least that large. That is the green light to sell premium instead of praying on direction.
Choosing the Right Strike and Expiration
I almost always sell the weekly call that expires one week after the catalyst. Weekly contracts hold the most time decay per day, and the market makers have to price in the full event move plus the weekend theta. Strike selection depends on my intent.
- Keep the stock: sell a call 5-10 % out-of-the-money. If the drug fails, the premium cushions the drop and I still own the shares for a future rebound. If the drug succeeds, I am called away for a tidy gain plus the premium.
- Exit entirely: sell an at-the-money call. I am content to let the stock go and simply harvest the rich premium.
Either way, the initial credit lands in the account the next business day, and I treat it as a reduction of my cost basis.
Managing the Trade After the News
Once the headline hits, volatility collapses and the call you sold can lose 50-80 % of its value in minutes. That is your cue to buy it back and close the trade. I use a simple rule: if I can close the short call for 25-50 % of the premium I collected, I book the gain and free up the capital.
If the drug is approved and the stock rockets past my strike, I let assignment happen. Trying to roll up and out usually costs more than the original credit, and the opportunity cost of tying up the capital is not worth it. Take the win, move on.
Position Sizing and Circuit Breakers
Biotech names are notorious for binary gaps, so I cap any single position at 2 % of my portfolio net worth. On top of that, every trade has a circuit breaker: if the underlying drops more than 20 % below my cost basis after premium, I exit and re-evaluate. Pride has no place when the market is telling you the thesis is broken.
I also keep a mental stop on the option itself. If the short call doubles in price from my entry, something unexpected is happening and I close it out. Time decay stops helping once the option starts moving against you faster than the theta decay can offset.
Real Example from April 2024
A student in our YouTube community flagged a small oncology company with a PDUFA date set for April 30. On April 22 the stock was trading at $7.30 and the May 3 $8 call was fetching $0.95. He owned 2,000 shares and sold 20 contracts, collecting $1,900 in premium.
On May 1 the FDA issued an approval and the stock opened at $11.40. The calls were assigned. Net result: he kept the $1,900 premium plus $1.40 per share on the stock appreciation, for a total gain of $4,700 on a $14,600 position in ten days. Annualized, that is north of 1,100 %.
If the FDA had rejected the drug and the stock fell to $3, his effective cost basis after premium would have been $6.35, limiting the loss to roughly 53 % instead of 59 %. The premium did not eliminate risk, but it meaningfully changed the risk-reward equation.
Risks and Common Pitfalls
The biggest mistake I see is selling calls too close to the money on a low-float stock. If the float is under 20 million shares, a short squeeze can generate a 400 % gap and your broker will auto-exercise. Stick to names with options volume above 1,000 contracts a day and floats above 50 million shares. Liquidity keeps the market honest.
Second pitfall: failing to account for FDA delay risk. Approvals often slip by 90 days, which means your weekly call expires worthless but the next weekly still carries elevated premium. If you are happy to own the stock through a delay, roll the call out for another credit. If not, close the entire position and move on.
Can I use covered calls on a biotech stock I do not yet own?
Yes. Buy the shares and sell the call in one order (a buy-write). Make sure the net debit leaves enough upside room to justify the risk of a rejection.
How far out should I sell the call before the FDA date?
I aim for the weekly that expires five to eight trading days after the catalyst. That captures the steepest part of the volatility curve without adding unnecessary weekend theta.
What happens if the stock gaps above my strike on positive news?
Your shares are called away and you keep the premium plus any appreciation to the strike. If that outcome bothers you, sell a call further out-of-the-money.
Binary events are the closest thing the market has to a coin flip, but they are also the rare moment when Wall Street voluntarily pays you to hold risk. Use the covered-call framework, keep position sizes small, and always know your circuit breaker before the news hits. If you want the exact checklist I hand to new members, grab it at cashflowmachine.net/options-mentorship.
This is education, not financial advice. Past performance is not indicative of future results. Consult a qualified advisor before making investment decisions.