Small Hedged Position Increase

By Travis Johnson, Stock Gumshoe, October 23, 2013

I’ve written several times that I’m very impressed with the performance and excellent business model of Ligand Pharmaceuticals (LGND), which I profiled for you back in June when it was in the low $30s and started buying a week or so later personally, but I have been waiting since then for a price dip to buy more.

Well, the stock is still trading for 100X trailing earnings, it has risen rapidly without really conclusive news (a drug approval that may or may not lead to strong sales with Pfizer, a hope that Kyprolis will get a stronger sales burst when Amgen’s salesforce gets ahold of it) and it shows no signs of dropping just yet — so I did add a very small amount to my Ligand holdings, but I also sold some near-term covered calls against my position to hedge myself just a little bit.

That means if the stop climbs to the low $60s over the next couple months, roughly a 15% gain from here, I’ll willingly sell with, by then, roughly a 90% gain in six months for my personal position — and if it climbs 20 or 30% or more, well, I’ll be out of luck because I’ll be selling at a 15% gain. If it climbed 20% or more I’d be tempted to sell anyway with the valuation getting so stratospheric, so this just gives me the discipline of doing so and generates a bit of income against a stock that pays no dividend.

I’ll let you know how it works out, ideally the stock will still be in the high-$50s at the end of the year or will dip substantially and give me another buying opportunity and I’ll just keep my option premium cash, but we could certainly see sharply higher prices if Kyprolis or Promacta gets a really abrupt jump in sales. There’s certainly some risk in doing anything now, since they report earnings next in just a week, on October 30, so there’s no particular reason why anyone else should follow my lead on this — I’m just managing the risk and cash flow of my personal account.

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