Biotech Trading Vs. Investing 101

by: Market Shadows

Courtesy of Pharmboy At Phil's Stock World

Biotechs are the lifeblood of the pharmaceutical industry. These small companies take risks that many larger pharmaceutical organizations would not usually make (scientists call it bureaucracy). Those risks come with a high failure rate, and therefore investing in biotechs is not for the faint of heart.

There are many investment house boutiques that offer input on biotech investing. I recently noticed that several writers at Seeking Alpha have combined their writing powers and started a biotech investing page (and even Adam Feuerstein gave them a plug). It's not that I find other authors wrong in their analysis, as many are quite good. What I find hard to swallow is the amount of money one can spend on buying a single service (as an example) for just investing in biotechs. For us, not only is there a biotech component, but many other trading strategies are present for a longer term portfolio that uses options and hedging strategies. Also, at PSW, Phil, Optrader and many others are here almost every day to answer questions.

We are coming to the end of the year, with three months left, and lots of holidays to make our way through. Many of our biotechs have done little to nothing the past few months. Over the past few days, our discussions were centered around investing and some trading (it is really called gambling, no?). Some biotechs are investments, some are trades on binary events. We have been selling calls and puts on some, reducing our exposure to others, and otherwise just waiting for data.

Let's revisit a few of our old picks, as well as look at upcoming events that will move some stocks for better or worse.


Seattle Genetics (NASDAQ:SGEN) - We played them for the approval, and we did not get the huge pop we expected, but the buy/write strategy worked just fine. This is one I would hold on to, as I believe they will not be around forever. Buying the stock in here and selling the December $20 calls and $17.5 puts for net $3.90.

Ariad (NASDAQ:ARIA) - One of our best plays ever (well, IMGN below was also pretty sweet). If you are not in them, scale in (buy 100 shares and sell the January $9 straddle for $3.20 or better) or just sell the November $8 puts for $0.35 or better.

Immunogen (NASDAQ:IMGN) -This one has been a huge winner on several occasions. Buy the stock and sell the Jan 2012 $10 straddle for $3.10 or better.

Curis (NASDAQ:CRIS) - Noted here. Buy the stock, and forget about them. Options are thinly traded.

Protalix (NYSEMKT:PLX) - Must I write about them any more? Read about them here.

Micromet (NASDAQ:MITI) - Written about here. I like the technology, and Amgen has joined their bed. Time will tell how good of an investment this one will be, but antibodies are still a hot area (noted above for IMGN and SGEN). Buy the stock, sell the November $5 calls for $0.35 or better. If they expire worthless, do it again next month.

Trades On Events

Targecept (TRGT) - I first noted them here, and the stock is off from our initial entry (February 2012 $20/25 Bull Call Spread for $2.55). We are trading this for positive data due out sometime this quarter. I don't like selling puts against something close to a clinical trial outcome, but I do like taking the risk that the data are positive. The $20/25 spread is still an OK to have at a cheaper price, but because the stock needs to move up so much, I like initiating a new one for those that are not in the original position. The February 2012 $15/17.5 Bull Call Spread is $0.65, and pays ~4:1 if the company closes over $17.5. Scale here, and this is gambling money.

Arena (NASDAQ:ARNA) - This is a hard one, because we shorted its competition, and then were burned by the FDA sting on ARNA. For 1.40, I think the company is worth a flier for money that can be used on side bets. Selling calls OTM against the position over the past few months would have reduced the cost basis by almost 20%. I like buying the stock and selling the January 2012 $1.50 Calls for $0.33. That is investing (ha!) as I know you can do the math if it is called (28%).

BioSante (BPAX) - Female libido drug. If it works, the stock soars, if not, it goes boom, literally. We have stock and I will be dumping when it moves up. Also holding the December $2.5/5 bull call spread. The price is better here, so I will add to it for $0.40 or better. Fun money only, capiche? November 14 is the PDUFA date FWIW.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Pharmboy may have some positions in these biotech stocks.