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Swing/Day Trading FDA Panel Notes

|Includes: Jazz Pharmaceuticals, Inc. (JAZZ)

 Tomorrow the information-starved market gets its crack at the FDA panel notes on Jazz’s new treatment for fibromyalgia, as yet known as JZP-6. There are lots of methods out there as far as playing biotech binary events goes, but I feel there’s very little associated with the note release to panel period. I wanted to share a method I occasionally use to make a little extra cash flow with the increased volatility surrounding the release of these notes. I feel like 5% is a realistic goal for this strategy, which isn’t bad for a day or two of work.

First, I’d like to summarize the general sentiments of the blogosphere regarding the content of the panel. The concern of the panel will likely not be over safety and efficacy – the drug appears to excel in these two areas – but rather with the potential illicit use of the drug’s main ingredient. The active ingredient in JZP-6 is sodium oxybate, a chemical that is basically gamma-hydroxybutyric acid, or GHB – a schedule 1 drug in the United States. While Jazz already markets the drug Xyrem for narcolepsy that is also basically GHB, the total market size for that drug is relatively puny. The market for fibromyalgia, however, is orders of magnitude larger than that of narcolepsy. With a whole lot more GHB floating around the potential for illicit use is much higher. There is already a REMS (Risk Evaluation and Mitigation Strategy) in place for Xyrem, and the consensus opinion seems to be that the panel will focus on whether that REMS will be adequate for the larger market. See my previous article for a more in depth analysis of my own viewpoint.

Now, generally when the panel notes are released, if the notes reflect exactly what the market expects the price tends to go up. This is because the uncertainty of whether something really scary is in those notes evaporates. If, however, something unexpected creeps in the market can mash on the panic button and the price can swing in the opposite direction. Expect people to be especially paranoid about exact wording of statements. One constant in the market is that investors tend to be risk-averse and – given the potentially huge price swing associated with the panel – investors holding JAZZ will be especially on edge. As I understand it, the panel notes usually cause a downward trend in the stock price. You should, however, be ready for a price swing in either direction.

Trading the notes

Basically, the market is going to quickly digest the notes and pick a direction. At this point you don’t even need to look at the notes. You want to wait long enough that a clear direction, up or down, has been decided upon and then either buy into the uptrend or short into the downtrend. Timing is key so you may not want to use this strategy if you aren’t near a computer all day. There are several ways to make sure you get in early. I generally follow the stock price and any big swings I check against the FDA panel website. You can also sign up for e-mail alerts from Biorunup.comand Gekkowire is usually on top of things as well (for Vivus’ panel Gekkowire was the first one I saw with the information). I’ll also publish the notes here as soon as I get word of their release. I call this price swing ‘Wave 1′. It’s made on very little real information as no one has read the release in it’s entirety; as far as I know someone mashes on the gas in a particular direction after a 15 second skim and everyone else followed.

So you’re in, you don’t know what the notes actually say, and you’re adrenaline is pumping. At this point, I suggest doing your due diligence and reading the notes. You really should be alternating between reading the notes, checking the share price, and scanning for any news released with respect to those notes. While reading the notes, look for anything especially scary sounding. In the case of JZP-6, you want to scan for where the REMS and illicit use issue is brought up and make sure the wording doesn’t look especially inflammatory. Then, check safety and efficacy to make sure there’s nothing unexpected. Finally give it good run through, scanning for anything at all that looks suspicious. What you’re doing is trying to find what the bloggers and web journalists are going to point to when they publish an article stating their opinion on the release notes. Their comments will affect ‘Wave 2′ of any price swings. It doesn’t really matter if they know what they’re talking about or not, the first bit of synthesized information the market is going to eat up. Be prepared for this. Generally, it would appear that Wave 2 follows the same direction as Wave 2, but don’t count on it.

As the day continues on, you want to keep checking the news via your favorite sites. The equity groups usually don’t issue an opinion so you’re just going to follow the main news sources. As much as I hate to say it, Adam Feuerstein will probably have a large impact on the price momentum whenever his article comes out (he will also be liveblogging, from what i understand). Try to get at it first. You may also want to use Twitter, if you don’t already, as new information tends to be tweeted and re-tweeted relatively fast. The stock will usually continue in the direction it chose in Wave 1 and 2 as day traders and late adopters pile on the trend and as long as no strong news to the contrary is released.

At this point you want to formulate an exit strategy. It’s probably three to six hours after the notes went public and you’ve probably ridden the momentum of the market to a gain of a few percentage points. I like to look for a reversal in the upward trend before I get out. How large that reversal is will be entirely up to you. Maybe 1% down or up from a relative high or low at any given point is your cue to exit your position. I personally watch the chart and if I feel that the sentiment has changed at any time I promptly leave. Keep your goals modest, as greed can crush you here. The trend will often extend to the next day as people become more certain of the potential outcome of the panel, but there are no guarantees here.

Summary

In summary, this is a relatively high-risk trading opportunity and shouldn’t be for people who don’t have the cash to keep trading costs low or the time to watch your computer all day. There is, however, what I feel is a strong and predictable momentum that builds with the release of the FDA panel notes. Furthermore, even given the high risk associated with the day trading, it beats the much riskier trade of holding through the panel. With some good timing and a bit of luck you can make somewhere around 3-5% or more return in a day or two. It’s also a great exercise in reacting to the market to those who are more comfortable trading on fundamentals. I also want to reiterate my disclaimer and say that I make no guarantees that this works every time – but I do find it to be a reasonably high probability trade. Good luck!

Also, feel free to share your own strategies in the comments. You don’t even need to leave an e-mail address if you don’t want.



Disclosure: No positions.