Congrats. Now Don't Forget to Book Your Profits...
By Rob Fannon
December 11, 2009
We nailed it.
Last Friday, I showed you a low-risk biotech trade setting up to deliver big gains in less than a week. Before we get to where the trade is today, let me back up...
The 51st annual meeting of the American Society of Hematology, commonly known as "ASH," wrapped up on Tuesday. It's one of the biggest cancer meetings of the year.
Biotechs use conferences like ASH to release important trial results, announce partnerships, and reveal new acquisitions. Of course, all of the above are stock price-moving events. Traders thrive on the short-term volatility.
The most anticipated news at this year's ASH was data from biotech player Celgene. The company unveiled Phase III results for its blockbuster drug, Revlimid, in newly diagnosed, early-stage multiple myeloma patients.
In short, Celgene's Revlimid numbers were a mixed bag. The drug helps patients ward off cancer after the first round of chemotherapy. But it failed to show a clear benefit when added to chemotherapy in the earliest stages of treatment. At $60,000 per year, doctors won't use the drug in early treatment without crystal-clear proof Revlimid is helping patients live longer.
To be fair, this Phase III trial is still ongoing. When the full results are ready in late 2010, Celgene may emerge the winner. But the market is an instant-gratification beast. Doubts about Revlimid sent Celgene's market cap down $1.5 billion this week.
We didn't know how Celgene's data would look. But we did know this: Regardless of the outcome, Celgene's stock would be on the move. To capture this volatility, we put on a "long straddle."
A long straddle involves the purchase of both a call and a put option at the same strike price. You win if the stock price moves a certain amount in either direction. You lose if it stays the same. So a long straddle is a perfect way to play volatility.
To play the Celgene results, I suggested buying the December $57.50 call and put options for $1.75 each – for an upfront cost of $3.50. As long as Celgene's stock moved above $61 ($57.50 plus $3.50) or below $54 ($57.50 minus $3.50), we'd win.
If you took my advice, congratulations. While your gains came up short of my triple-digit goal, we got a gift from the market. Here's how it worked out...
On Tuesday, Celgene shares opened at $53, dropping as low as $52.75 on Wednesday. That downward movement caused a spike in the put options. (They traded hands above $4.50 at one point.) Meanwhile, the calls fell to $0.25. So you could have sold both for a total of $4.75. That's $1.25 in profit on your $3.50 – a 35% gain.
For those traders who still hold the position, you have a chance to book a nice profit. As I write, Celgene shares are hovering around $53.70. The December $57.50 calls and puts can be sold for at least $4, a 15% gain. Not bad for a seven-day trade.
You have until next Friday, option-expiration day, to close out your position. But prices will drop as we get closer to that date. So if you haven't closed it out already, I suggest you do so now.
If you missed this trade, don't worry. We'll use more low-risk, high-reward trading strategies like the Celgene straddle to play biotech volatility in 2010.
Good investing,
Rob Fannon
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Intel surges... world's largest chipmaker hits a fresh 52-week high. |
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Big utility rally continues... Duke, Dominion, PG&E, and others make new highs. |
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Bond market signals inflation... long-term rates creep higher as short-term rates stay low, creating the biggest spread in 17 years. |
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Copper slides down 4.5% from 15-month high. |
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Last |
Change |
52-Wk |
| S&P 500 |
1109.30 |
+1.45% |
+27.03% |
| Oil (USO) |
40.29 |
+2.99% |
-12.75% |
| Gold (GLD) |
111.63 |
+1.72% |
+52.29% |
| Silver (SLV) |
18.01 |
+5.01% |
+92.41% |
| U.S. Dollar |
75.37 |
+0.68% |
-13.15% |
| Euro |
1.49 |
-0.70% |
+17.54% |
| VIX |
22.89 |
-2.01% |
-65.48% |
| HUI |
475.53 |
+3.26% |
+155.07% |
| 10-Year Yield |
3.33% |
-0.10 |
-0.37 |
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|
| Company |
Sym |
Industry |
IBM |
IBM |
computers |
3M |
MMM |
conglomerate |
MedcoHealth |
MHS |
pharma |
Enbridge |
ENB |
pipelines |
Marvell Tech |
MRVL |
semiconductors |
Southwest Air |
LUV |
airlines |
Enterprise GP |
EPE |
refining |
Microchip Tech |
MCHP |
semiconductors |
ONEOK |
OKE |
utilities |
Canon |
CAJ |
cameras |
Canadian Natl Rail |
CNI |
railroads |
American Electric |
AEP |
electric utilities |
Republic Services |
RSG |
garbage |
Dollar General |
DG |
discount stores |
AMD |
AMD |
semiconductors |
Lam Research |
LRCX |
semiconductors |
Kinder Morgan |
KMR |
pipelines |
Merck |
MRK |
pharma |
Boeing |
BA |
Big Defense |
Duke Energy |
DUK |
utilities |
Broadcom |
BRCM |
semiconductors |
Xcel Energy |
XEL |
utilities |
Enbridge Energy |
EEP |
pipelines |
Affiliated Computer |
ACS |
tech services |
Windstream |
WIN |
telecom |
Terra Industries |
TRA |
fertilizer |
Coca-Cola |
KO |
soft drinks |
Comcast |
CMCSA |
cable TV |
Dominion |
D |
utilities |
PG & E |
PCG |
utilities |
Agrium |
AGU |
fertilizer |
DTE Energy |
DTE |
utilities |
ONEOK Partners |
OKS |
pipelines |
Edwards |
EW |
medical devices |
Braskem |
BAK |
chemicals |
Intel |
INTC |
semiconductors |
Altria |
MO |
cigarettes |
TransCanada |
TRP |
utilities |
Telmex |
TII |
telecom |
CIGNA |
CI |
health insurance |
Altera |
ALTR |
semiconductors |
Wisconsin Energy |
WEC |
utilities |
Celanese |
CE |
chemicals |
F5 Networks |
FFIV |
networks |
Verizon |
VZ |
telecom |
Potash |
POT |
chemicals |
Enterprise |
EPD |
oil & gas drilling |
Sempra Energy |
SRE |
utilities |
Canadian Pacific |
CP |
railroads |
Warner Chilcott |
WCRX |
pharma |
CenterPoint |
CNP |
utilities |
SCANA |
SCG |
utilities |
Marvel Ent |
MVL |
movie production |
Walt Disney |
DIS |
entertainment |
DIRECTV |
DTV |
telecom |
Allergan |
AGN |
pharma |
Progress Energy |
PGN |
utilities |
Clorox |
CLX |
bleach |
Rockwell Auto |
ROK |
electrical equip |
LAN Airlines |
LFL |
airlines |
R.R. Donnelley |
RRD |
printing |
Steel Dynamics |
STLD |
steel |
|
| Company |
Sym |
Industry |
Pantry |
PTRY |
grocery stores |
Delta Petroleum |
DPTR |
oil & gas drilling |
Seahawk Drilling |
HAWK |
oil & gas drilling |
Kingsway |
KFS |
insurance |
|
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