Approval, finally!
Having experienced the roller coaster ride of Spectrum Pharma's share price (SPPI) on Friday ahead of key FDA announcement (see below), long investors were finally relieved to confirm the approval of Fusilev's use in colorectal cancer late Friday (read about my approval rate estimate). There was already a substantial amount of interest in SPPI ahead of FDA's announcement and the dramatically increased trading volume further adds to the volatility of the stock. What makes it even more interesting is the timing of the news release, taking place late Friday and preventing traders to take any action even in after-hour trading. As a result, considerable buying and purchasing orders will be submitted while call and put options will be swapped between investors come Monday morning.
Trading map
As mention before, I anticipate an early pop (~10 to 15%) in SPPI early in the morning (beginning pre-market trading), followed by a sell-off. This leaves just a narrow window to purchase put options before the stock tanks. Therefore, investors should already have in mind which options to buy before Monday's market open. The most important question then becomes: which options are the SAFEST and MOST PROFITABLE? Here, I've compiled the data from some of the most recent and popular biotech companies gaining an FDA approval and the fate of their stock price post approval. I thought this would provide a better understanding regarding the rate of share price DECLINE (as opposed to INCLINE which most beginner traders wrongly expect following positive news coming from the FDA). The companies analyzed were Avanir (AVNR), Dendreon (DNDN), and Somaxon (SOMX). Each of these 3 companies had amazing run-ups before the PDUFA, punctuated with a post-approval surge. However, also common among these three companies was the post-approval slide in their stock prices within a short time following the regulatory approval of their investigational drugs. The date of approval, stock price immediately pre- and post-approval, the price increase on approval, and the time it took for stock price to drop 10, 15, 20, and 25% are tabulated below.
Another way to analyze the trend would be focusing on the % change in stock price post-approval in a given time period (i.e. 1, 2, 3, 4 weeks). This information is shown below. Personally, I think these data are tremendously valuable for choosing not only the MOST PROFITABLE but also the LEAST RISKY options to purchase.
Since sample size is small, the range of stock price change is quite large. Nevertheless, the information above can still serve as a rough guideline for how to trade around SPPI's approval. Here's the breakdown of what I anticipate to take place tomorrow:
Post-approval spike
$9 (current price) x 1.125 (12.5% (avg btw 10 and 15%) pop tomorrow morning) = $10.13
Price at 2 weeks post-approval
$10.13 (see above) x 0.9 (estimate of 10% drop) = $9.12
Price at 4 weeks post-approval
$10.13 x 0.85 (estimate of 15% drop) = $8.61
Based on these estimates, I will look into buying May $10 or $9 puts AND June $9 puts. Since many are looking to buy put options in anticipation of a quick plunge of SPPI, I would be cautious to buy if options prices are too high. As of Friday, the prices for May $10, $9 and June $9 puts were $1.80, $1.25, and $1.25, respectively. I think these are very expensive and I will be buying tomorrow morning at price drop.
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Good luck everyone!
Orders filled as of 6:38 am PT:
ReplyDeleteMay $9 puts @ $0.50
June $9 puts @ $0.78