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Step right up and place your bets, folks - Amarin's (AMRN) ADCOM for Vascepa is on Wednesday, and in the balance hangs the ability to be able to prescribe Vascepa to an additional patient population of over 30 million.

I've penned a couple of articles this past week, the first based on whether or not someone had advance notice of the "bad" news coming on Friday, and most recently an article pointing out some of the "negatives" in the FDA briefing document. It's worth noting that a fair share of Amarin bulls that I've spoken with seem to think that the briefing is exactly what they expected, and without negative sentiment. If so, the potential upside for longs just got a lot nicer. If not, they're heading straight into a brick wall.

As someone that has advocated an options spread to take advantage of the volatility coming this week, I wanted to run over what the three most likely scenarios could be coming on Wednesday, and what their likely effect on Amarin's stock price could be.

1. Vascepa is Immediately Recommended for ANCHOR Approval

This outcome would bring ultimate validation for both Vascepa and its investors. If the drug is recommended for this indication without delay, Amarin has effectively added to its patience population by exponential factors. This would be the definition of a positive catalyst. Longs would have their first real reason to celebrate since the FDA's approval.

We already know that the market cares about the outcome, judging by the insane volume and heavy trading on Friday.

I would expect, on a positive recommendation that the market would take back all losses from Friday up to $7 and then run through that towards about $10/share for starters.

2. Vascepa is Immediately Not Recommended for ANCHOR Approval

This outcome, would put enormous pressure on Amarin. Aside from not having the patient population accessible, it would force Amarin to begin thinking about future financing again, as well as making sure that it continues to execute with Vascepa.

This is a road that would lead toward eventual dilution and many longs throwing in the towel. I'd look for the market to correct from its already semi-lofty valuation of the company at $5/share (about $855 million market cap), and wind up trading in the low $3 region until Vascepa could continue to show traction with its current patient population.

If this happens, Amarin becomes much less of a speculation stock, and there's going to be serious emphasis on the company's cash burn for this past quarter - as well as hopeful traction with Vascepa prescription revenues.

3. ADCOM Suggests Waiting for REDUCE-IT Study to Finish

This is the scenario that options spread traders should fear the most. Putting off ANCHOR until 2016 would definitely deal a short-term blow to the company but wouldn't necessarily rule the company out for the long run.

Those that have positioned with options straddles or strangles should fear this outcome, as it's not likely to move the stock enough in one direction or another to create enough volatility that options traders would need.

Should this situation occur, I'd hypothesize Amarin settling in the low to mid $4 range moving forward.

Trading Strategies

Options Spreads

I had previously noted that this ADCOM meeting was going to definitely move the stock one way or another. In another recent article of mine. I recommended a $7 options straddle as a possible trade, one that would likely be in the money on this volatility:

An alternate trading strategy, instead of simply going bullish on Amarin, would be to play an options spread. This is the perfect situation to play a straddle, as again - we get the impression that the stock is going to be anywhere but $7 come 2014.

A spread reduces risk because instead of betting on the stock to move one direction or another, you're simply betting on the volatility - the fact that the stock is going to be moving a considerable amount in one direction or another.

That position would already be on the verge of being in the money simply based on the FDA's briefing documents, released on Friday. The real volatility, however, is still yet to come.

Writing Calls for Current Investors

If you already have a long position in Amarin, this is the time to write calls. The implied volatility on AMRN options is through the roof. $6 calls that expire this week can insure a long position up to 20% with the way that options are currently trading.

Short Scalp After Positive Catalyst

I talked about this strategy in a previous article, but I'll offer up a quick reminder of what I'm talking about.

In "My 17 Rules...," one of the recurring themes is emotion in trading and how to use it to your advantage. I wrote:

Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they baghold buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:

"This stock may never stop going up! Better get in no matter what cost!"

And conversely:

"This company is doomed! We are going to zero right here, right now, on this crash!"

This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash.

One trend that I've noticed is that there is a lot of emotion behind biotech stocks leading up to catalysts. It's one of the reasons I expected AMRN to run up to this meeting - until the briefing docs were released.

What I've noticed from a lot of biotech catalysts is that the emotional charge behind the event often leads stock running far higher than rational, and that on good news the share price usually pulls back and corrects. Here are three examples of biotech catalysts and corresponding price movements:

StockEvent DatePPS SpikePPS Low
Keryx (KERX)1/28/13$9.08 (1/31/13)$6.43 (2/28/13)
Amarin4/18/11$19.50 (5/27/11)$6.35 (12/16/11)
Arena (ARNA)6/27/12$11.81 (7/10/12)$7.24 (8/13/12)

Should Amarin be recommended for approval, it could be a good spot for a quick short scalp, as biotechs have a history of running hard after a positive catalyst and then pulling back.

As always, I look forward to an exciting Wednesday - and wish all traders the best of luck.

Source: The 3 Most Likely FDA Outcomes For Amarin's Vascepa