Arena: Which Way, Up Or Down?

| About: Arena Pharmaceuticals, (ARNA)
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Of late, I've been thinking a lot about small investors, a group in which I number myself. Over years of studying biotechs, I sometimes wonder if I know more, or by knowing more, know less.

Recently, I wrote an article on another stock that I followed for well over two years. I was drawn in by the company and its potential oncology drug, but then the bottom fell out when it failed in a Phase 3 clinical trial. While I wasn't invested in that firm (nameless, because it is now under $1/share), I increasingly question my own ability to know what to buy. In fact, I question anyone's ability to know what to buy.

Which is how I think with respect to Arena Pharmaceuticals (ARNA). A recent article by an SA author offered a very interesting trading angle, but it's much too complicated for my simple brain to understand. Nevertheless, it's an intriguing view and merits highlighting:

"We believe that placing a collar on a position in Arena could be a wise investment. Before we continue, we must note that this position WILL NOT generate profits on the same scale as if one were to simply hold the stock. Your upside is capped. But so is your downside. Hence, the collar. It limits your gains and losses to a potential range. For those unfamiliar with what an options collar is, it is a combination trade where you are long the underlying stock, sell a call against it (covered call), and purchase a put as well."

My interpretation is that the author is saying, 'Protect yourself and hedge your bets' (so to speak). I need to think about this. Maybe the author's right. Maybe that's the only way to safely trade biotechs.

When it comes to these obesity drugs, voices are certainly lined up on both sides. I think I'm getting to the point where not only do I not believe what anyone writes, I'm not sure what to believe. In clinical studies, there seems to be a huge gap between Phase 2 and Phase 3. How many times has a drug candidate flown through Phase 2 with flying colors only to crash and burn in Phase 3? And this last year, a new theory is out there that small biotech companies under an "x" cap rarely, very rarely ever make it to market.

So how are we to approach Arena? Do I buy because of Lorcaserin? Or do I buy simply by studying the technicals? Or is it both?

Seeing that the share price has already spiked from $1.76/share on 16 March 2012 to over $3/share, this has been a great run for those who got in early. But wouldn't it better to take your profits and move on?

Suggesting it's time to sell rather than buy, of course, runs counter to those who are prepared to go very long term (i.e. years and years). Nevertheless, looking back to the company's March news release does make a buy look tempting, but here is where I pause. Success will surely fuel a mighty run north, but then...

I end with good market advice: Never risk more than you're willing to lose.

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

Additional disclosure: Investors buy and/or sell at their own risk.