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A Low-Risk Double... No Matter Which Way the Stock MovesBy Rob Fannon, editor Phase 1 InvestorFriday, December 4, 2009 Last December, all eyes were on biotech company Allos Therapeutics.
The market was sweating upcoming clinical data for the company's only drug under development. Positive data would bring Allos one step closer to launching a drug to treat an aggressive type of lymphoma – for which no other treatment existed. Shares raced up more than 60% in the six weeks ahead of the December 8 release.
Then the market took all those gains back. The highly anticipated data fell short of the hype. Allos stock plummeted – falling more than 40% below the pre-release runup.
I expect even more fireworks this year.
You see, the 51st annual meeting of the American Society of Hematology (ASH) kicks off this weekend in New Orleans. The focus of the meeting is "liquid cancers," malignancies of the blood and lymphatic systems like lymphoma, leukemia, and myeloma.
Each year, traders gravitate toward a couple highly anticipated clinical trials. They place bets prior to the data release, hoping for a quick buck. Good results, of course, can push stocks higher. Poor data can initiate a blood bath.
This year, biotech players like Seattle Genetics, Incyte, Cephalon, Micromet, and Onyx Pharmaceuticals all have important presentations at ASH. I expect each of their stocks to move at least 7%-10% next week.
But the spotlight this year shines squarely on Celgene (CELG) and its multiple myeloma drug Revlimid. And I see a low-risk way to pocket 50% to 100% gains.
Revlimid is a certified blockbuster, on pace to cross the $1.5 billion sales mark this year. Right now, it holds FDA approval for multiple myeloma patients who have failed at least one prior therapy. But if Celgene gains approval as a first-line therapy in newly diagnosed patients, the company could fetch another $500 million – at a minimum – in annual Revlimid sales.
On Monday, Celgene presents the first set of complete data from a Phase III trial on newly diagnosed patients.
Back in July, the company reported positive preliminary data from this trial during its second-quarter conference call. The good data, as well as impressive quarterly sales numbers, pushed Celgene shares up 17%. That's no small move for a $25 billion stock.
Regardless of whether Revlimid's final data is positive or negative, you can bank on major volatility in Celgene stock on Monday. That could mean a quick double for aggressive traders...
A "straddle" is a perfect way to play volatility no matter which direction a stock moves. A "long straddle" involves the purchase of both a call and put option at the same strike price. And Celgene is a near-perfect setup.
Celgene shares trade hands at $57.33 as I type. You can buy the December $57.50 calls and puts for about $1.75 each – for a total upfront cost of $3.50.
Now, as long as Celgene's stock price moves above $61 ($57.50 plus $3.50) or below $54 ($57.50 minus $3.50) by December 18 (options-expiration day), you profit. That's a measly 6%-8% shift from today's price.
Positive data on Monday could propel Celgene's shares as high as $65. On the other hand, unexpected side effects or less-than-impressive data could send shares spiraling down to $52 or below. In either case, a long straddle could generate 50%-100% returns in just a few days.
For straddle trades like this, you want to buy "at-the-money" options to increase the likelihood of booking a profit. This is a short-term trade, so December options are best. Most important, don't overpay to get into this or any straddle trade. If you need the underlying stock to move more than 10% to profit, head to the next opportunity.
And of course, as with any options trade, this speculation is risky. If Celgene doesn't budge, you may lose money. It's best to risk only money you can afford to lose and set tight stop losses. But with two weeks until option-expiration day, you'll have plenty of time to close the trade at a minor loss.
Every biotech trader blocks out the first few days in December for an annual ASH trade. If you are itching to join the party, a Celgene long straddle is your best bet to profit from stepped up volatility next week.
Good investing,
Rob Fannon
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