End of the quarter

The binaryleverage portfolio ended Q1 on a strong note closing up 2.5% on yesterday’s close. This was primarily due to a strong move by HZNP which looks like it might be getting ready to run ahead of its PDUFA date. I am now up 21% in HZNP. I thought about taking some profits today but decided to wait until next week to see if it can keep the momentum going. Volume was significantly increased – the stock usually trades very thinly with an average volume of 60K. Today more than 800K shares were traded.

 

 

 

 

 

 

 

 

AFFY continued its descent. I closed the position yesterday but I certainly left some money on the table. I sold my puts yesterday for $115 per contract. Today they traded as high as $160 per contract. 

 

 

 

 

 

 

 

 

It has now been 4 months since I started keeping track of this portfolio on this site. In that time we are up ~55% as of today. In the same time-frame the NASDAQ is up 22% while the NBI is up 24%. The annualized Sharpe ratio of the portfolio stands at 4.4 which compares favourably with both the NASDAQ (3.9) and NBI (3.6).

Out of AFFY (again)

AFFY had another tough day today. I decided to close my position (April $13 puts), selling the remaining 50% of the contracts at $115. I am up 133% in total on the trade. There may be more downside left in this but I am happy to bank the profits at this stage.

AFFY’s weak day

Here is a 2 hour chart of AFFY’s price during March. 

 

 

 

 

 

 

 

 

Sizable spike yesterday after trading was resumed post approval, but today it was all downhill. I still have half of the April puts I bought yesterday afternoon – today’s weakness may drive some momentum to the downside tomorrow.

I had a fairly small position in the puts (total size was ~1% of the NAV) so unfortunately the gains were not enough to make up for the weakness in the other positions; everything else closed down on yesterday. Finished the day down 1.6% which was the largest negative move since March 6th (coincidentally the day of the largest drawdown).

AFFY puts

AFFY dropped today – consistent with my research on this topic. I have taken a conservative step and sold half of my April $13 puts for $95 per contract. I bought them yesterday for $45 per contract so this is a 111% gain. I am keeping the remaining contracts in the hope of a further drop (they represent a free trade as I have recouped the original capital). I will probably not hold beyond the close tomorrow.

In AFFY again

A couple of weeks ago I wrote a piece on some research I have done looking at stock movements after an FDA approval. I was essentially testing the “sell the news” hypothesis. My results strongly supported this as a strategy with 10 winners and 2 losers over a 2 day holding perdiod. I am therefore going to test it in real time with AFFY. To this end I have taken on a small position in AFFY April $13 puts, purchased for $45 per contract.

I want to emphasise that I am not pessimistic about AFFY’s long term prospects – this is a position that I only intend holding for a few days.

Out of AFFY

As planned, I closed my AFFY position yesterday afternoon. I sold the last shares at $13.85 – up ~24% on the whole position. I had hoped for more enthusiasm in the afternoon but watching the excitement of this mornings bear raid I am glad to be out of it. I am still expecting approval.

Taking more AFFY off the table

The AFFY PDUFA date is tomorrow. As previously mentioned, I lightened my AFFY holding by 50% on Friday. This morning I reduced again by another 50%. So I am now holding one quarter of my original shares. I sold on Friday at $13.41 (22% gain) and this morning sold for $14.01 (27% gain). An approval might generate a bit of a pop but I think that there is such expectation for an approval built in that the spike might not be too dramatic. Given that, I will probably close this out towards the end of the day.

Changes to the portfolio

I am a day late updating on progress so my apologies for that. Yesterday saw another day of strong gains. Up >4% on Friday hitting another new high (3rd this week). My big movers were in HZNP and AFFY.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I decided to close half of my position in AFFY at the end of the day. I got out at a $13.41 with a 22% gain on my entry price of $11.01. I think this could still move on Monday but I wanted to make sure to lock in some gains. I am expecting an approval on Tuesday so if there is a strong move on Monday I plan on selling another half of the position and selling the remainder after the news (assuming a pop). My recent research suggests that it might be worth shorting whatever positive move follows an approval – however, in this case there is such bullish sentiment around the sales potential for the new drug that I am not convinced that is the right move.

I have also added XNPT to the portfolio. I have bought my usual sized holding (25% of the portfolio value) at an average price of $4.50. I may add some more detailed notes but the short of it is that Horizant has an upcoming PDUFA for post herpetic neuralgia (PHN) in early June. Horizant is already approved for restless leg syndrome but has not been enjoying impressive sales. The company is going through some difficulties with its marketing partner (GSK) and a resolution would provide a further catalyst. It has some interesting pipeline potential so may be a possible long-term hold – but I am just looking at it as a catalyst play in this portfolio. If it can break through the $4.75 area there is certainly room for a move to the upside.

 

Arena, Ariad And Talon: Further Learnings On Trading Ad Comm. Meetings

I recently wrote a piece over at SeekingAlpha looking at whether or not an upcoming FDA Advisory Committee represented a good trading opportunity. In the article, I outlined some analysis that I undertook looking at the results of trading ahead of an Ad Comm. Meeting based on defined entry and exit rules. My goal was simply to establish whether there was potential for trading around these events – I was not advocating the (very simple) strategy that I laid out.

The analysis suggested that there was an edge with this strategy with 70% winning trades over the time frame assessed (2 years). The positions were held for an average of 8 days and showed an expected return of 3.8%.

Given that this was a retrospective analysis I wanted to write a brief update looking at how Ariad Pharmaceuticals (ARIA) and Talon Therapeutics (TLON) might have been traded ahead of their Ad Comm. Meetings this week.

I did trade ARIA in my personal account but was late establishing the position and therefore had a sub-optimal entry price.

Results

The strategy that I investigated in my last article called for entering the trade at the close 15 days prior to the committee meeting. The trade was held until one of the following criteria were met at the close:

  • Target gain of 35% reached,
  • Initial target loss of 5% reached,
  • Trailing stop (max gain – 2% once position is +5%) reached,
  • Position still open with three days to go until meeting.

I would like to reiterate that all these targets (and the entry and exit points) are based on closing prices. Intra-day swings may require tolerating potential losses (and ignoring potential gains) greater than the strategy lays out.

Based on these criteria, the strategy would have traded ARIA and TLON as follows:

 

 

 

 

 

So the strategy would again produce again with these two stocks – though rather a small one.

If one were to use the strategy as a starting point, rather than a set of hard rules, might a different result have been possible? Reviewing the charts for these two stocks over the time period in question is helpful in addressing this question.

Looking at ARIA, the timing of the entry at 15 days provide a pretty good starting point. The initial stop loss was also placed at a logical level – in fact, based on the chart, one might have even decided to tighten the initial stop slightly based in recent support around $14.00. Exiting before the briefing documents was certainly the right move. ARIA is a much larger company than most of the biotechs that were reviewed for the initial analysis so it is not surprising that its price moved slightly less than many of the original set.

My position in ARIA had a 4% gain in two weeks.

The TLON chart is also useful. The takeaway here, for me, is that the initial -5% stop loss (hit at $0.90) was just too tight. The stock had good support at $0.86 and had hit this level several times in the preceding weeks. If the initial stop had been placed below this support (at, say, $0.84) then the rapid exit would have been avoided and the trader would have been in a position to capture the very significant gains in the stock over the following week.

Conclusions

The recent movement in the prices of ARIA and TLON provide more evidence that the Ad Comm. Meeting can provide a tradable event. They are attractive catalysts in that the timing is transparent (apart from some uncertainty about the precise timing of the briefing document release) and they have a meaningful correlation with the eventual outcome of the FDA decision process.

Arena Pharmaceuticals (ARNA) has announced that the Endocrinologic and Metabolic Drugs Advisory Committee will meet to discuss its drug lorcaserin on May 10, 2012. I will be watching this stock with a view to establishing a position in mid-April.