by Travis Johnson, Stock Gumshoe | April 21, 2010 10:36 am
Ian Cooper is teasing us about an options trade on a little biotech stock again — you might remember that about a year ago he and a few others were throwing out hyperactive teaser ads regarding Arena Pharmaceuticals, the company with a new weight loss drug that was on the verge of releasing results of a key study. Today, it’s not about obesity, it’s all about arthritis …
“By 4:00 PM on April 30th, the FDA will hand down a crucial drug approval decision — and with the information below, you could make up to 4.5 times your money, no matter which way they rule…”
Ooh, only nine days left! No wonder so many folks are forwarding this email to me. Essentially, what Ian Cooper claims is that he’s got this special “White Oak Docket” that tells him what the upcoming dates are for expected FDA decisions on drug approvals — and that he has an options strategy that tells you how to profit regardless of the decision.
We all know that small biotechs with key “bet the company” drugs move dramatically based on any news from the FDA — an approval could double or triple the shares, a rejection could cut them down by 90%, or a “need more information” could disappoint investors and cut the shares in half (those are just examples, each situation is very different).
Cooper likens this to a bet on a boxing match — which does, at least, remind us that “investing” based on an approval of a single drug is really “betting” on an event. But he tells us about a dream Vegas setup:
“The ONLY ‘win-win’ investing scenario on Earth
“Imagine being able to go to some sort of fantasy-world Las Vegas…
“You place a bet on a boxing match with 2 different bookmakers. The first of them offers you 4-1 odds that one fighter wins; the second offers you 4-1 odds that the other fighter wins.
“You don’t have to be a mathematician to figure that if you put 10 grand on both of them to win, you’re walking away with $20 grand in the clear no matter who ends up down for the count…
“This is EXACTLY the way I’m going to all-but-guarantee that you make serious money from the ‘White Oak Docket’ — by investing in both outcomes at high rates of profit.”
So that’s the basic idea here — he uses options to place bets both that the stock will fall and that it will rise immediately after the FDA’s expected decision, and he says the premiums and possible huge moves are such that you’ll win either way.
Of course, he bases that on hugely dramatic moves — he gives two examples, Xenoport, which had its restless leg syndrome drug rejected, dropped 68% in a day and the “put” options could have given you profits of 450% … and Intermune had its stock rise 69% in one day on good news from an FDA advisory panel last month, with a call option trade possibly netting you as much as 524%. So it’s easy to see that for either of those stocks and drugs, a straddle or strangle trade in options would probably have netted a nice return of perhaps several hundred percent, without having to know whether the stock’s huge move would be to the upside or the downside.
But of course, you have to pick the stocks that move dramatically — you could easily lose money on a straddle or strangle, particularly for a biotech stock where there’s a high implied volatility (meaning, the options trade at a big premium because, yes, you’re not the only one who knows that they have a key approval date coming) but the stock actually moves “only” 20 or 30%.
If you’re not familiar with those “straddle” and “strangle” terms, they just describe the options trades that Ian Cooper is talking about — betting that a stock will move significantly, but not caring in which direction.
A “strangle” trade is more aggressive — you buy both a put and a call option for the same expiration date, but at different strike prices (ie, you buy a call option for a bit above where the stock is trading, and a put option for a bit less than its trading — meaning the stock has to move to make your options profitable on either side).
A “straddle” is a little bit more cautious — you buy both a put and a call option for the same expiration date, at the same strike price. So you know that unless the stock just sits at that exact price until expiration either one of those options is guaranteed to be worth something, and the stock doesn’t have to move quite as much for the trade to become profitable. Of course, depending on the specific strike price you choose it tends to be a little less aggressive, and the profit potential is somewhat less as well.
So that’s the trade he’s effectively describing — I don’t know specifically whether he prefers straddles or strangles for these kinds of situations, but I’ll assume that he wants more leverage to very big stock moves so I’ll guess it’s a strangle, it doesn’t really matter for our purposes.
What stock, then, does he think will make this big move on April 30? That’s the key — to find it, he says that he’s gotten access to the FDA’s special “White Oak Docket,” a secretive calendar of the pending drug decisions from the FDA (The FDA is building out a big new campus in White Oak, which is a subdivision in Montgomery County, MD, just outside DC).
The FDA does not release any kind of calendar of upcoming drug approvals, and indeed they seem to have no strict schedule that they really have to abide by, only guidelines that are generally followed — but there are any number of subscription-based services that keep calendars based on information collated from company filings and press releases about upcoming “drug dates.” The companies themselves, obviously, are very focused on the FDA’s schedule and they keep investors as informed as they can about the progress of their drug applications, and thanks to our capitalist system and the power of the profit motive, several firms have done the work of sifting through that information to build a calendar that they can sell to investors. I’m going to assume that this is what Ian Cooper is talking about, though I have no idea which product he might follow.
That’s the big picture, though — how about this exact teaser? The next company that Cooper expects to move fast is a firm with an arthritis drug. Here’s how he teases it:
“when the FDA rules on one biopharma company’s arthritis drug on April 30th, we’ll be locked in tight and winning either way — thanks to the ‘White Oak Docket.’
“That’s the ‘catch’ every investor would love: No matter which way the review board rules on this company’s submission, 104% gains or more end up in your pocket.
“Now let me tell you a bit about the company I’m certain will bank you AT LEAST 104% gains on or before April 30th…
“46 million potential customers — and $15 billion in revenue
“Arthritis is one of the most debilitating, painful diseases a person can suffer from….
“Non-steroidal anti-inflammatory drugs are the most commonly used drugs to treat the pain. But users commonly experience abdominal pain, bleeding ulcers, liver and kidney damage.
“And those horrific side effects are exactly why this U.S. based micro-cap drug company has its new arthritis drug on the lips and minds of nearly every industry insider at the moment…
“Especially those with access to the ‘White Oak Docket.’
“Because they can see the decision date just a few weeks away — April 30th, to be exact.
“This company’s arthritis treatment is a heavy-duty pain reliever that comes in a single tablet form (fewer pills to take are always a good thing), and promises to cut down on gastro-intestinal side effects dramatically.
“Now unless you’re a pharmaceutical-industry insider or an arthritis sufferer, you may not realize the potential this drug has — not only for its users, but for the investors who ride this company’s innovation to the top….
“And get this — the potential for this drug is so huge that this small company has already found a partner… joining forces with one of the world’s largest bio-pharmaceutical companies.
“This titan of the industry has agreed to become the marketing partner, should the drug gain approval. And with the power of its worldwide presence behind it, this small company’s groundbreaking drug could flood not only the U.S. and its 46 million potential customers, but billions of arthritis sufferers worldwide.
“Word on the street is good… and the real money is still ahead of us. Thanks to the power of options trading, our “can’t lose” strategy is promising a potential gain of 104% at the very least in the few short weeks we have left leading up to their decision date.
“Remember, we’ve seen gains as high as 524% on FDA plays like this, thanks to the “White Oak Docket,” so what I’m sharing with you here is a drastically conservative estimate.
“And since you are now part of the small segment of the investing population that knows the exact date of this company’s ruling… you’ve got a leg up on millions of investors.
“I fully expect this company to double once again in very short order if they receive approval for their arthritis drug…
“As you’ve seen, that could EASILY spell massive options profits of 450%-524% or more, virtually overnight.”
So who is this little company poised for a big move? Throw all that info into the Thinkolator and we learn that this must be …
POZEN (POZN — you can probably look at a chart for this one and guess the current trend, but click here to see the free trend analysis of POZN from MarketClub, one of my advertisers)
Pozen does indeed have a drug for arthritis pain that is expected to receive an FDA response on April 30, the drug is called Vimovo and, as teased, it is already partnered with a big pharma — AstraZeneca in this case. Pozen has another drug that they’re currently receiving royalties on, Treximet, a migraine drug that’s marketed by GlaxoSmithKline and that has apparently been somewhat tepidly received (or tepidly marketed, depending on who you ask). One expects that investors are already pricing in an approval of this new drug to at least some degree, because the stock has already moved up dramatically over the last six weeks or so — you could have bought the shares down close to $6 in early March, and it’s at almost $11 as I type this.
From a layman’s perspective (that’s me — I love to lay around, and am certainly not a drug expert), Vimovo essentially combines the existing non-steroidal anti-inflammatory drugs with acid inhibitors and a layer of the pill that releases the drug only after acid is mitigated, helping to prevent the gastrointestinal side effects. The combination of anti-inflammatories with anti-acid proton pump inhibitors is apparently common in practice, so some folks seem to think that the drug approval is extra-likely, I have no idea whether or not that’s true, or if there are any other side effects.
POZEN gets a $20 million milestone payment from AstraZeneca if the drug receives FDA approval, plus royalties on sales, so that’s certainly a big deal for a small company (POZEN has a market cap of about $300 million), and they’re already sitting on close to $50 million in net cash, though they are, of course, not profitable and are in the generally not-profitable business of trying to discover and develop new drugs. Their other drugs in clinical trials are another migraine treatment, and a cardiovascular drug, and they have some other preclinical stuff happening — but Treximet and Vimovo appear to be the drivers for the immediate future.
And yes, there are options available on POZN — so if you’re convinced that the FDA will be definitive one way or the other when they respond on (or near, hopefully) April 30, as expected, you could trade in the May options which expire on May 21, so you’d have about three weeks for your thesis to work itself out.
As I said, I have no insight into Cooper’s brain and don’t know exactly which trades he might be making here, but for the May expiration there is pretty large open interest in the $10 and $12.50 calls (the shares are just shy of $11 this morning, and climbing quickly), and in the $7.50 puts. So let’s make a wild guess that Cooper is playing a very wide strangle on this stock.
If you bought the $12.50 call option for about $1, and the $7.50 put option for 50 cents (near where they’re trading now), you’d be out $1.50 for each share, and options contracts represents 100 shares so you’d be out $150 plus commissions for one strangle trade (two contracts).
So what happens? Well, since you’re out $1.50 per share you need the stock to go either above $14 or below $6 for your trade to become profitable. The shares are at $11ish now, so if the stock moves up 60% after the approval it would hit $17.60 and you’d probably be able to sell out of your contract for a roughly $3.60 per share, giving you a profit of $2.10 and a 140% return in a few weeks (minus commissions).
Of course, if the stock goes up 20% and stays in that area, you’re out of luck — your put option is worthless now, and you can sell the call option for probably somewhere between $1 and $1.50 (your call is at $12.50, and the shares possibly spike to somewhere around $13.50), but that just means you pretty much break even.
Likewise, if the FDA asks for more information or rejects the drug, and the company flops, it has to flop by at least 50% or so for you to make money (below $6 you’d be profitable, since your strike price is $7.50 on the downside and you paid $1.50 for the strangle).
You can do similar math for other strike prices, or for a somewhat less aggressive straddle (put and call at the same strike price) that doesn’t require the stock to move quite as much but that will cost more up front, and figure how much you need the stock to move to make a profit on any of them.
The nice thing, of course, is that you define your risk very precisely — if you bought that strangle I gave as an example (and just to reiterate, that is an example — I have no idea whether it’s a smart play for this stock, or if it’s similar to what Ian Cooper would recommend for an options trade), you could never lose more than $150, which is what you paid for the exposure to 100 shares moving up or down dramatically, and if the stock makes a truly huge move for some reason (ie, 500%, 2,000% on the upside, 80-90% on the downside over the next few weeks — which is very tough to predict), your upside is more aggressively leveraged than it would be buying the stock. If you buy the stock for $11, of course, you can also lose your full investment, which is — math alert — more than $1.50 per share.
The downside with options? As we noted, you generally need a pretty big move in a very brief period of time for an aggressive strangle trade like this to work — strike that, a very big move, a “pretty big” move like 10-20% in a few weeks wouldn’t do you much good with this kind of options trade, especially when the premiums on those options are quite large for a contract that’s only a month from expiration. You can improve your odds and decrease the potential return somewhat by using a straddle, or tightening the strangle to a $2.50 range instead of a $5 range.
But still, you need to be right that the FDA’s decision will be a big boom or bust for POZEN, and you need to be right that the FDA will be definitive and move the stock on or near the expected date of April 30. Remember, the pretty large option open interest (for such a small stock) in these contracts, and the big premiums, should tell us that there are a good number of folks (possibly Ian and his subscribers, I don’t know) already betting on some big moves — that doesn’t mean they’re right or wrong, but this is somewhat similar to our boxing match: when everyone starts betting the same way (and the stock is moving up, too), the bookies adjust the odds (ie, the options sellers raise their ask prices).
And finally, as with all options trading services and newsletters, remember that options touts cannot help but dramatically impact the movement in the prices of contracts they recommend — if you have more than a few dozen followers, the options prices for a tiny stock like this could move very fast once you make a recommendation (there are only a few thousand contracts outstanding for most of POZN’s options, which is a lot in the context of a tiny drug stock but a tiny amount compared to 1,000 subscribers trying to buy a few hundred contracts each).
The main problem that I always hear about for options trading newsletters is that it’s nearly impossible to get the prices that the editor recommends just because there’s not enough liquidity in most options contracts to absorb a big new crowd of investors all coming in at once. So this goes for us, too, I’m pretty sure that Cooper is teasing POZN options but I obviously don’t know exactly which ones and I’ve just given some plausible examples — I’m not telling you to buy or sell anything, and remember, the stock has already almost doubled from the lows of just a couple months ago, there’s already a pretty strong expectation built in that investors will be rewarded for their faith in this new drug.
Oh, and just FYI, POZEN actually does have an official earnings release scheduled for April 29, too – unlikely to move the stock as much as this potential FDA decision could, unless they say something else about the products or pipeline in the conference call, but you never know, that’s one other potential catalyst before the next options expiration date.
So what do you think? Interested in taking a flier on our little friend POZEN or the associated options? Let us know with a comment below.
And, as always, we want to know what folks think of Ian Cooper’s Options Trading Pit — if you’ve subscribed, click here to let us know what you thought. We’ve seen several reviews so far, but they average out to pretty, well, average.
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