Wall St. Watchdog reveals information about 50 stocks that hit 52-week lows in today’s trading. Note that this list excludes all stocks with a market capitalization less than $10 billion:
1. Agilent Technologies Inc.(NYSE:A): Up 5.48% to $31.01. Agilent Technologies, Inc. provides core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. The Company’s operations include electronic measurement, bio-analytical measurement, semiconductor and board testing.
2. ABB Ltd.(NYSE:ABB): Up 1.77% to $16.71. ABB Limited provides power and automation technologies. The Company operates under segments that include power products, power systems, automation products, process automation and robotics.
3. Archer Daniels Midland Company(NYSE:ADM): Up 1.86% to $24.61. Archer-Daniels-Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products. The Company processes oilseeds, corn, milo, oats, barley, peanuts, and wheat. Archer-Daniels-Midland also processes produce products which have primarily two end uses including food or feed ingredients.
4. Agrium Inc.(NYSE:AGU): Up 1.37% to $64.97. Agrium Inc. supplies nitrogen, potash and phosphate for agricultural, industrial, and specialty use. The Company operates throughout the America’s while it markets its products globally.
5. American International Group, Inc.(NYSE:AIG): Up 0.44% to $20.55. American International Group, Inc. is a holding company which, through its subsidiaries provides a varied range of insurance and insurance-related activities in the United States and abroad. The Company’s main activities include both general insurance and life insurance & retirement services operations as well as financial services and asset management.
6. Applied Materials Inc.(NASDAQ:AMAT): Up 4.26% to $10.27. Applied Materials, Inc. develops, manufactures, markets, and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. The Company’s customers include semiconductor wafer and integrated circuit manufacturers, flat panel liquid crystal displays, solar photovoltaic cells and modules and other electronic devices manufacturers.
7. America Movil S.A.B. de C.V.(NYSE:AMX): Up 1.53% to $21.83. America Movil SAB de C.V. provides wireless communications services in all regions of Mexico. The Company also participates in telecommunications joint ventures in several other South American countries as well as in the United States.
8. Apache Corp.(NYSE:APA): Up 3.03% to $78.82. Apache Corporation is an independent energy company. The Company explores for, develops, and produces natural gas, crude oil, and natural gas liquids. The Company has operations in North America, onshore Egypt, offshore Western Australia, offshore the United Kingdom in the North Sea (North Sea), and onshore Argentina, as well as on the Chilean side of the island of Tierra del Fuego.
9. Air Products & Chemicals Inc.(NYSE:APD): Up 3.57% to $76.51. Air Products and Chemicals, Inc. produces industrial gas and related industrial process equipment. The Company also produces and markets polymer chemicals, performance chemicals, and chemical intermediates. Air Products recovers and distributes oxygen, nitrogen, argon, hydrogen, carbon monoxide, carbon dioxide, synthesis gas, and helium, as well as medical and specialty gases.
10. AngloGold Ashanti Ltd.(NYSE:AU): Down 1.2% to $40.21. AngloGold Ashanti Limited is a holding company for a group of companies which explore for and mine gold internationally. The Group has operations in the Vaal River and West Witwatersrand areas of South Africa as well as Namibia, Mali, Brazil, Argentina, Australia, Tanzania and the United States.
11. Bank of America Corporation(NYSE:BAC): Up 4.16% to $5.76. Bank of America Corporation accepts deposits and offers banking, investing, asset management, and other financial and risk-management products and services. The Company has a mortgage lending subsidiary, and an investment banking and securities brokerage subsidiary.
12. Brookfield Asset Management Inc.(NYSE:BAM): Down 1.55% to $25.96. Brookfield Asset Management Inc is a global asset management company focused on property, infrastructure and renewable power. The Company owns office buildings in major business centers. Brookfield also owns and operates power generating plants, ports, railways, utilities and timberlands, and invests on behalf of third parties.
13. Banco Bradesco S.A.(NYSE:BBD): Up 2.36% to $14.75. Banco Bradesco S.A. attracts deposits and offers commercial banking services. The Bank offers business loans, personal credit, mortgages, lease financing, mutual funds, securities brokerage, and Internet banking services. Bradesco operates in Brazil and Argentina, the United States, the Cayman Islands, and the United Kingdom. Bradesco offers credit cards, insurance, and pension funds.
14. BHP Billiton plc(NYSE:BBL): Up 4.8% to $53.76. BHP Billiton Plc is an international resources company. The Company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining.
15. Becton, Dickinson and Company(NYSE:BDX): Up 2.12% to $72.34. Becton, Dickinson and Company manufactures and sells a variety of medical supplies and devices and diagnostic systems. The Company’s products are used by health care professionals, medical research institutions, and the general public. Becton’s products are marketed worldwide.
16. Franklin Resources Inc.(NYSE:BEN): Up 5.79% to $95.61. Franklin Resources, Inc. provides investment advisory services to mutual fund, retirement, institutional/separate accounts and high net worth investors. The Company manages various asset classes including domestic, international/global and emerging markets equity, domestic, international and municipal fixed income, money funds, alternative investments, and hedge funds.
17. BHP Billiton Ltd.(NYSE:BHP): Up 4.02% to $67.01. BHP Billiton Limited is an international resources company. The Company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining.
18. The Bank of New York Mellon Corporation(NYSE:BK): Up 6.21% to $18.82. Bank of New York Mellon Corporation (BNY Mellon) is a global financial services company. The Company provides financial services for institutions, corporations and high-net-worth individuals, providing asset management and wealth management, asset servicing, issuer services, clearing services and treasury services.
19. BlackRock, Inc.(NYSE:BLK): Up 3.83% to $147.20. BlackRock, Inc. provides diversified investment management services to institutional clients and to retail investors through various investment vehicles. The Company offers the BlackRock Funds and Blackrock Liquidity Funds, and also provides risk management services to fixed income institutional investors.
20. Bank of Montreal(NYSE:BMO): Down 0.43% to $53.85. Bank of Montreal, doing business as BMO Financial Group, is a Canadian chartered bank which operates throughout the world. The Bank offers commercial, corporate, governmental, international, personal banking, and trust services. Bank of Montreal also offers full brokerage, underwriting, investment, and advisory services.
21. The Bank Of Nova Scotia(NYSE:BNS): Down 2% to $47.48. Bank of Nova Scotia provides retail, commercial, international, corporate, investment and private banking services and products.
22. BP plc(NYSE:BP): Up 0.57% to $35.42. BP plc is an oil and petrochemicals company. The Company explores for and produces oil and natural gas, refines, markets, and supplies petroleum products, generates solar energy, and manufactures and markets chemicals. BP’s chemicals include terephthalic acid, acetic acid, acrylonitrile, ethylene and polyethylene.
23. The Blackstone Group(NYSE:BX): Up 5.31% to $11.91. The Blackstone Group LP is a global alternative asset manager and provider of financial advisory services. The firm’s asset management businesses include the management of corporate private equity funds, real estate funds, mezzanine funds, proprietary hedge funds and closed-end mutual funds. Blackstone also provides M&A and reorganization advisory, as well as private placement services.
24. Citigroup, Inc.(NYSE:C): Up 5.54% to $24.39. Citigroup Inc. is a diversified financial services holding company that provides a broad range of financial services to consumer and corporate customers around the world. The Company’s services include investment banking, retail brokerage, corporate banking, and cash management products and services.
25. Caterpillar Inc. (NYSE:CAT): Up 2.82% to $72.54. Caterpillar Inc. designs, manufactures, and markets construction, mining, agricultural, and forestry machinery. The Company also manufactures engines and other related parts for its equipment, and offers financing and insurance. Caterpillar distributes its products through a worldwide organization of dealers.
The Strategy Every Investor Must Use to Be Successful
24
Oct/11
Using Options In Speculative Biotech Investing
by admin under best stocks investments for 2012, best stocks to buy now for 2012, best stocks to hold 2012, best stocks to invest, Best stocks to invest in 2011, best stocks to invest in 2012, Best stocks to invest right now, best stocks to pick up, best way to invest in 2012, good stocks to invest in 2012, great stocks to invest in 2012, hot penny stocks for 2012, hot stocks for 2011, penny stock picks 2012, small-cap-stocks, stock selection for 2012, stocks for 2012, stocks to invest in 2012, top penny stocks for 2012
When searching the web one can find a never ending list of articles and write-ups focused on the latest and greatest biotech stocks. These articles usually fulfill their purpose of increasing the awareness of up and coming biotech companies but often times fail to follow through on investing strategies. Many investors, if they decide to invest, will simply just go long the stock in question and await the final verdict of success or failure. While this is a perfectly viable investing strategy, one should also consider another avenue and that is the use of options. Either by themselves or in conjunction with a long (or short) position, they can make a speculative biotech trade a much more dynamic and profitable venture. This article’s purpose is to introduce some possible option trades and how they might be used in certain popular biotech stocks. Not all will be suitable for every investor by any means. Some will be quite risky while others will fall well into the conservative side of the trade. In the end though, it is hoped that the information communicated will teach investors how to spot potential options trades for themselves and not have to depend upon others or fall victim to an insane market.
The Long Call
This option trade is by far the easiest of all but also one of the most risky. Investors are attracted to this trade as there is a limited risk but unlimited reward potential. Another reason why investors like this trade is that it is much cheaper to buy call options than it is to buy the corresponding number of shares of the actual stock. For the speculative biotech investor there needs to be a little analysis done before entering into such a trade. First, the investor needs to determine the correct time frame the call needs to be purchased. For example, if a major groundbreaking decision is going to be made in late December 2011 it would make little sense to be buying calls in July 2011, as no one is expecting any meaningful events to occur by then. Second, one would need to determine the correct strike price to purchase. For example, if a stock were to trade at $2 a share and after some in-depth analysis one feels the stock should trade up to $10 a share after positive events, it would make little sense to be buying calls at the $20 strike as they will expire worthless. Let’s look at a real world example.
Dendreon Corporation (DNDN) was a much beloved speculative biotech stock that soared in value as a series of events fell into place for the company. The stock traded in the mid to high $30 level as DNDN seemed to be hitting on all cylinders. Then the company had a sharp drop in price as demand for their product just did not materialize as was suggested by management. Today the stock trades around $9 a share while the company attempts to drum up business and demand for their drug. If you have faith that they will be successful in their attempt and foresee the stock at a much higher price in the coming year then maybe the purchase of the long call is as viable option. Let’s look at an option chain and see where we could buy one.
In our example we could just buy 100 shares of DNDN for $900 but let’s buy 2 January 2012 $10 contract for $1.40 instead. What we are buying is the right to purchase 200 shares of DNDN for $10 at any point in time from the time of purchase to the expiration date of the third Friday of January 2012. For this right we are going to be paying $280 ($1.40 x 2 contracts). So here are some possible scenarios of how this trade might play out.
• DNDN $10 on January 2012 – This outcome turn into a losing position for us. The investment makes money if the price is over $10 so a closing at $10 means the calls expire worthless and we lose all our initial investment of $280. The bright side is that we are only out our initial investment and nothing more and the risks were known before the trade commenced. In this case we would have been better off just buying the 100 shares for $900 as we would be up $100 on the trade.
• DNDN $5.00 on January 2012 – This outcome is also a losing position for us. The investment makes money if the price is over $10 so a closing at $5 means the calls expire worthless and we lose all our initial investment of $280. The bright side is that we are only out our initial investment and nothing more. If we had bought 100 shares of stock instead then we would have been better off as we would have a $400 loss.
• DNDN $20.00 on January 2012 – This outcome is the option investor’s dream. With DNDN at $20 on expiration day the call option we bought is worth $10 a contract ($20 share price – $10 strike price). Our initial investment for each call was $1.40 and we have 2 of them so our profit is $1,720 ($20 share price – $10 strike price – $1.40 original cost) X 2 contracts). This is the power of the long call. In comparison, if we had just bought the 100 shares of stock our profit would have been $1,100 ($20 share price – $9 purchase price). So in this instance the long calls would have made the most for the investor and was cheaper than buying the stock itself.
See the chart below for a visual representation.
Synthetic Long
A synthetic long option trade is an even riskier trade than the long call. In this trade one still buys a long call but finances the deal by selling a put option. At this point let’s discuss selling a put. When selling a put, one is agreeing to purchase a specific amount of a certain stock, for a specific price, within a given time frame. In return, as the seller you are going to be compensated for the promise by being paid cash upfront when the deal is made. With that cash in hand you then buy the long calls. Basically you are financing the entire deal with no money out of pocket but most brokers will make sure you have enough margin or cash on hand just in case. This is a risky trade but if successful can be most rewarding. Let’s look at another real world example.
An up and coming speculative biotech is Keryx (KERX) who is a biopharmaceutical company focused on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of life-threatening diseases, including cancer and renal disease. Keryx is trying to bring two drugs to the market but it is Perifosine that has the potential to make a big splash for the company. Let’s look at an option chain and see where we could place a synthetic long option play based upon the company’s upcoming events.
By January 2013 Perifosine’s studies should be coming to an end and if successful the share price might be much higher than today’s value. That being the case let’s sell 5 January 2013 $2.50 put contracts and try to get $1.40 for each making a total of $700 (5 contracts = 500 shares X $1.40) of cash received. Being this far out in time the bid and ask are going to be wide so it might take some time. With this cash we are then going to buy 5 January 2013 $5 calls for $1.40. Other than commissions, the transaction did not cost us a dime but we have taken on lots of risk though. Let’s see how it plays out with examples. Please note thought that if one sells puts they can be executed at any time and not just at expiration. In our examples thought we will hold till expiration.
• KERX $5.00 on January 2013– This outcome is a push and we break even in the trade. The puts sold at the $2.50 strike will expire worthless but so will the $5 calls. All we are out here is the commissions on the trade. In this case we would have been better off just buying the shares at today’s price of $3 a share as we would have had a $2 profit per share.
• KERX $2.50 on January 2013 – This outcome is also a push and we break even in the trade. The puts sold at the $2.50 strike will expire worthless but so will the $5 calls. All we are out here is the commissions on the trade. In this case we would not have been better off just buying the shares at today’s price of $3 a share as we would have had a $0.50 loss per share.
• KERX $1.00 on January 2013 – This outcome is the big loser for the trade. With KERX at $1 on expiration day the call options we bought are worthless but we will be buying the 500 shares of KERX for $2.50 share as stipulated by the puts we sold unless we exit the contracts early. The 500 shares at $2.50 is $1,250 but the shares trade at $1 so we can recoup $500 ($1 X 500shrs). If we sold those shares back it would be a total loss of $750 for the entire trade.
See the chart below for a visual representation.
Bull Call Spread
Another option trade that is a bit more complicated but less risky is the bull call spread. This trade starts out like our long call trade above except that at the same time we buy one call, we short another call at a higher strike to reduce the cost of the trade. The negative aspect of this trade is that we will cap our gains but the flip side of the coin is that we will reduce our costs to initiate the trade. Let’s see an example as it is easier to visualize. Let’s consider Biosante Pharmaceuticals (BPAX) which is developing Bio-T-Gel. This is a once-daily transdermal testosterone gel for the treatment of male low testosterone levels. With a market in the U.S. over $1.2 billion and a license to Teva Pharmaceuticals, the company is one of the top speculative choices for biotech investors. A NDA is pending with the FDA having a date of November 14, 2011. That being the case, here is the option chain.
As one can see, the call options are pretty active as we grow closer to the pending date with the FDA. After careful consideration let’s say you want to purchase a bull call spread in December 2011 and you want to buy the $2.50 call for $0.60 and sell the $3.50 call for $0.30. Let’s make it interesting and purchase 10 calls in total. So to buy 10 December 2011 $2.50 calls it will cost us $600 ($0.60 X 10calls = 1,000shrs). At the same time we sell 10 December 2011 $3.50 calls for $300 ($0.30 X 10 calls = 1,000). Our total costs will be $300 to enter the trade ($600-$300). Now here is what can happen.
• BPAX $1 on December 2011– This outcome is a big loser for the trade. The call sold at the $3.50 strike will expire worthless but so will the $2.50 calls we bought. Our total loss is the $300.
• BPAX $2.50 on December 2011– This outcome is also a big loser. The call sold at the $3.50 strike will expire worthless but so will the $2.50 calls we bought. Our total loss is the $300.
•BPAX $3.50 on December 2011- This outcome is as good as it is going to get for the trade. With BPAX at $3.50 on expiration day the $2.50 call options we bought are worth $1 ($3.50 pps – $2.50 call). The $3.50 calls we sold are going to expire worthless. Our net cost to enter the trade was $300 and the long calls are worth $1,000 (10 calls = 1,000shr X $1 per call) so our total profit is $700.
•BPAX $10 on December 2011- Once again, since we are short the $3.50 calls that is where our gains will be capped. BPAX could climb to $100 and it would not matter. The difference between the strikes we bought and sold is $1. Our out of pocket cost is $0.30 so our net profit is all but capped at $0.70. Since we have 10 calls that equal 1,000 share we have a $700 profit plain and simple.
See the chart below for a visual representation.
Long Put
Up to this point we have been reviewing how to use options to make money in the biotech world. Now let’s shift gears and see how to use options to protect gains one already has. There are a couple of ways to do it but the best is via the long protective put. If an investor buys a protective put, they are basically paying for insurance, plain and simple. The buyer is paying the seller a set amount of money so that the seller will be obligated to buy a specific number shares at a future date for a specific (strike) price. That concept is simple and easy to understand. If on the expiration date the price of the stock is above the strike price where the put is sold, then the put expires worthless and the seller gets to keep 100% of the funds that you paid him and does not have to buy the stock. If on the expiration date the price of the stock is below the strike price where the put is sold (and the option is not closed out by you, the buyer), then the put will be exercised and the seller of the put will be getting your share at the agreed upon price. Of course, as the buyer of the put you can execute the contract at any time before expiration if you so choose. Once again let’s see an example.
Let’s look at Oncothyreon Inc. (ONTY) which currently has one major play on their hands with the drug Stimuvax. Stimuvax is a therapeutic vaccine designed to stimulate an individual’s immune system to recognize cancer cells and control their growth in order to increase the survival of patients. ONTY has partnered with Merck KGaA of Darmstadt, Germany, who is developing Stimuvax under a license agreement. There are two Phase III trials of Stimuvax underway, and interim results are due by the end of this year. Back in 2009 ONTY was selling for less than $1 and I am sure many people who bought then are still holding shares today. With a closing price of around $6, they have netted a substantial profit already. The question is how to protect the profits as they await the results? One answer is to buy the put. Here is the option chain.
Speculative biotech stocks are volatile so option premiums are going to be high translating into expensive contracts. Our investor, buying shares at less than $1, has over $5 a share profit to protect. One option would be to buy the January 2012 $6 put for $1.80 or $180 per 100 share of ONTY they own. Is that expensive? Yes but here is the logic. If the results are outstanding and the stock soars to $10 then the increase in the stock price will more than make up for the cost of the put that will expire worthless. On the other hand, if the results totally fail and the stock price plummets to $2 a share, the put will kick in at $6 and protect most of the profits. In that case the put owner would receive $4.20 ($6 strike – $1.80 cost per contract) a share for the stock that is trading at $2 a share. On the surface it sounds terrible but just ask anyone long DNDN at $35 a share who woke up the next morning to find the shares trading at $12 if they wish they had puts.
Finally, after investors get a taste of options they want to start using them right away across all different biotech stocks. They are often disappointed though when they find out that lot of these stocks do not even have options. For example, consider the company AEterna Zentaris (AEZS) which shares the same exposure to the drug Perifosine as KERX above. KERX has actively traded options while AEZS does not have any at all. Or consider the company Antares (AIS) who is a small pharmaceutical company with a business line that focuses on self injection technologies and topical gel-based products. At first glance one would assume they would surely have options because of their huge potential, but that is not the case as they have none at all. The key point here is to make sure you have actively traded options available before just diving into a trade hoping they will be there when you need them.
In conclusion, this article is just a taste of the world of options and how they might be used in the speculative biotech investing world. There is no way that just one article could cover the gambit of all the different combinations and styles of option trades that exist. Before trading options, one needs to understand all the risks and rules associated with the trade. What I hope is communicated though is that without options, the biotech investor can be place at a disadvantage as they are not equipped with all the tools they need to give them the best chance for success.
best stocks for 2012, best stocks to buy now, best stocks to invest in 2012, best stocks to invest in now, good stocks for 2012, good stocks to buy for 2012 Comments Off more...
24
Oct/11
The Strategy Every Investor Must Use to Be Successful
by admin under best stocks investments for 2012, best stocks to buy now for 2012, best stocks to hold 2012, best stocks to invest, Best stocks to invest in 2011, best stocks to invest in 2012, Best stocks to invest right now, best stocks to pick up, good stocks to invest in 2012, great stocks to invest in 2012, hot penny stocks for 2012, hot stocks for 2011, penny stock picks 2012, stocks to invest in 2012, top penny stocks for 2012, top stocks to invest in, ways-to-invest-money, what are the best stocks to invest in
Fear is in the market. Look no further than the Volatility Index, or the VIX (otherwise known as the investor’s fear gauge) to see that the fear is palpable. However, opportunities are plentiful with the VIX trading at 45 – especially those of us who use credit spreads for income.
Why?
Remember, a credit spread is a type of options trade that creates income by selling options.
And in a bearish atmosphere, fear makes the volatility index rise. And, with increased volatility brings higher options premium. And higher options premium, means that options traders who sell options can bring in more income on a monthly basis.
So, I sell credit spreads.
Let me explain how valuable and imperative this strategy is to your long-term investment goals.
As we all know the market fell sharply in the beginning of August 2011 and the small cap ETF, iShares Russell 2000 (NYSE: IWM) traded roughly 18 percent below its high one month prior.
So how can a bear call spread allow me to take advantage of this type of market, and specifically an ETF, that has declined this sharply?
Well, knowing that the volatility had increased dramatically causing options premiums to go up, I should be able to create a trade that allows me to have a profit range of 10-15 percent while creating a larger buffer than normal to be wrong.
Sure, I could swing for the fences and go for an even bigger pay-day, but I prefer to use volatility to increase my margin of safety instead of my income.
Think about that. Most investors would go for the bigger piece of the pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush. Take the sure thing every time. Don’t extend yourself. Keep it simple and small and you’ll grow rich reliably.
Back to the trade.
Basically, IWM could have moved 9.8 percent higher and the trade would still be profitable. This margin is the true power of options
So, let’s take a look at the trade I suggested to TradeMaster subscribers using IWM. IWM was trading for $70.86:
* Sell IWM Sep11 78 call
* Buy IWM Sep11 80 call for a total net credit of $0.24
The trade allowed IWM to move lower, sideways or even 9.8 percent higher over the next 32 days (September 16 was options expiration). As long as IWM closed below $78 at or before options expiration the trade would make approximately 12.0 percent.
It’s a great strategy, because a highly liquid and large ETF like IWM almost never makes big moves and even if it does, increased volatility allowed me to create a larger than normal cushion just in case I am wrong about the direction of the trade. So, selling and buying these two calls essentially gave me a high probability of success – because I am betting that IWM would not rise over 10 percent over the next 32 days.
However, I did not have to wait. IWM collapsed further and helped the trade to reap 10 percent of the 12 percent max return on the trade. With only 2 percent left of value in the trade it was time to lock in the 10 percent profit and move on to another trade.
I am always looking to lock in a profit and to take unneeded risk off the table especially if better opportunities are available.
I bought back the credit spread by doing the following:
* Buy to close IWM Sep11 78 call
* Sell to close IWM Sep11 80 call for a limit price of $0.04
I was able to lock in 20 cents in profit on every $2 invested for a 10% gain in less than 5 days. Not too shabby.
So let’s review the benefits of the Options Advantage Credit Spread Strategy
Inherently, credit spreads mean time decay is your friend. Most options traders lose value as the underlying index moves closer to expirations. This is not the case with the credit spread strategy, as the underlying ETF moves closer to expiration and remains below/above the short strike of the spread, the strategy makes money.
1. The strategy is a one to two month trade that does not require constant monitoring of the market.
2. The strategy works in all market conditions (bull, bear, directionless).
3. Can make 5% to 15% a month.
4. Uses a diverse group of highly liquid ETFs
5. Enables you to determine your rate of success and the potential profit/loss and risk/reward before the trade is placed.
So please, get signed up now or my Options Advantage service. Learn the intricacies of how to effectively trade options. This is a new way to trade options, one that is essentially new to the retail public and it is my goal to teach anyone and everyone willing to listen how to use options in their daily investing lives.
There’s not much time left to secure your spot for this exclusive event.
Oct/11
Using Options In Speculative Biotech Investing
by admin under best stocks investments for 2012, best stocks to buy now for 2012, best stocks to hold 2012, best stocks to invest, Best stocks to invest in 2011, best stocks to invest in 2012, Best stocks to invest right now, best stocks to pick up, best way to invest in 2012, good stocks to invest in 2012, great stocks to invest in 2012, hot penny stocks for 2012, hot stocks for 2011, penny stock picks 2012, small-cap-stocks, stock selection for 2012, stocks for 2012, stocks to invest in 2012, top penny stocks for 2012
When searching the web one can find a never ending list of articles and write-ups focused on the latest and greatest biotech stocks. These articles usually fulfill their purpose of increasing the awareness of up and coming biotech companies but often times fail to follow through on investing strategies. Many investors, if they decide to invest, will simply just go long the stock in question and await the final verdict of success or failure. While this is a perfectly viable investing strategy, one should also consider another avenue and that is the use of options. Either by themselves or in conjunction with a long (or short) position, they can make a speculative biotech trade a much more dynamic and profitable venture. This article’s purpose is to introduce some possible option trades and how they might be used in certain popular biotech stocks. Not all will be suitable for every investor by any means. Some will be quite risky while others will fall well into the conservative side of the trade. In the end though, it is hoped that the information communicated will teach investors how to spot potential options trades for themselves and not have to depend upon others or fall victim to an insane market.
The Long Call
This option trade is by far the easiest of all but also one of the most risky. Investors are attracted to this trade as there is a limited risk but unlimited reward potential. Another reason why investors like this trade is that it is much cheaper to buy call options than it is to buy the corresponding number of shares of the actual stock. For the speculative biotech investor there needs to be a little analysis done before entering into such a trade. First, the investor needs to determine the correct time frame the call needs to be purchased. For example, if a major groundbreaking decision is going to be made in late December 2011 it would make little sense to be buying calls in July 2011, as no one is expecting any meaningful events to occur by then. Second, one would need to determine the correct strike price to purchase. For example, if a stock were to trade at $2 a share and after some in-depth analysis one feels the stock should trade up to $10 a share after positive events, it would make little sense to be buying calls at the $20 strike as they will expire worthless. Let’s look at a real world example.
Dendreon Corporation (DNDN) was a much beloved speculative biotech stock that soared in value as a series of events fell into place for the company. The stock traded in the mid to high $30 level as DNDN seemed to be hitting on all cylinders. Then the company had a sharp drop in price as demand for their product just did not materialize as was suggested by management. Today the stock trades around $9 a share while the company attempts to drum up business and demand for their drug. If you have faith that they will be successful in their attempt and foresee the stock at a much higher price in the coming year then maybe the purchase of the long call is as viable option. Let’s look at an option chain and see where we could buy one.
In our example we could just buy 100 shares of DNDN for $900 but let’s buy 2 January 2012 $10 contract for $1.40 instead. What we are buying is the right to purchase 200 shares of DNDN for $10 at any point in time from the time of purchase to the expiration date of the third Friday of January 2012. For this right we are going to be paying $280 ($1.40 x 2 contracts). So here are some possible scenarios of how this trade might play out.
• DNDN $10 on January 2012 – This outcome turn into a losing position for us. The investment makes money if the price is over $10 so a closing at $10 means the calls expire worthless and we lose all our initial investment of $280. The bright side is that we are only out our initial investment and nothing more and the risks were known before the trade commenced. In this case we would have been better off just buying the 100 shares for $900 as we would be up $100 on the trade.
• DNDN $5.00 on January 2012 – This outcome is also a losing position for us. The investment makes money if the price is over $10 so a closing at $5 means the calls expire worthless and we lose all our initial investment of $280. The bright side is that we are only out our initial investment and nothing more. If we had bought 100 shares of stock instead then we would have been better off as we would have a $400 loss.
• DNDN $20.00 on January 2012 – This outcome is the option investor’s dream. With DNDN at $20 on expiration day the call option we bought is worth $10 a contract ($20 share price – $10 strike price). Our initial investment for each call was $1.40 and we have 2 of them so our profit is $1,720 ($20 share price – $10 strike price – $1.40 original cost) X 2 contracts). This is the power of the long call. In comparison, if we had just bought the 100 shares of stock our profit would have been $1,100 ($20 share price – $9 purchase price). So in this instance the long calls would have made the most for the investor and was cheaper than buying the stock itself.
See the chart below for a visual representation.
Synthetic Long
A synthetic long option trade is an even riskier trade than the long call. In this trade one still buys a long call but finances the deal by selling a put option. At this point let’s discuss selling a put. When selling a put, one is agreeing to purchase a specific amount of a certain stock, for a specific price, within a given time frame. In return, as the seller you are going to be compensated for the promise by being paid cash upfront when the deal is made. With that cash in hand you then buy the long calls. Basically you are financing the entire deal with no money out of pocket but most brokers will make sure you have enough margin or cash on hand just in case. This is a risky trade but if successful can be most rewarding. Let’s look at another real world example.
An up and coming speculative biotech is Keryx (KERX) who is a biopharmaceutical company focused on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of life-threatening diseases, including cancer and renal disease. Keryx is trying to bring two drugs to the market but it is Perifosine that has the potential to make a big splash for the company. Let’s look at an option chain and see where we could place a synthetic long option play based upon the company’s upcoming events.
By January 2013 Perifosine’s studies should be coming to an end and if successful the share price might be much higher than today’s value. That being the case let’s sell 5 January 2013 $2.50 put contracts and try to get $1.40 for each making a total of $700 (5 contracts = 500 shares X $1.40) of cash received. Being this far out in time the bid and ask are going to be wide so it might take some time. With this cash we are then going to buy 5 January 2013 $5 calls for $1.40. Other than commissions, the transaction did not cost us a dime but we have taken on lots of risk though. Let’s see how it plays out with examples. Please note thought that if one sells puts they can be executed at any time and not just at expiration. In our examples thought we will hold till expiration.
• KERX $5.00 on January 2013– This outcome is a push and we break even in the trade. The puts sold at the $2.50 strike will expire worthless but so will the $5 calls. All we are out here is the commissions on the trade. In this case we would have been better off just buying the shares at today’s price of $3 a share as we would have had a $2 profit per share.
• KERX $2.50 on January 2013 – This outcome is also a push and we break even in the trade. The puts sold at the $2.50 strike will expire worthless but so will the $5 calls. All we are out here is the commissions on the trade. In this case we would not have been better off just buying the shares at today’s price of $3 a share as we would have had a $0.50 loss per share.
• KERX $1.00 on January 2013 – This outcome is the big loser for the trade. With KERX at $1 on expiration day the call options we bought are worthless but we will be buying the 500 shares of KERX for $2.50 share as stipulated by the puts we sold unless we exit the contracts early. The 500 shares at $2.50 is $1,250 but the shares trade at $1 so we can recoup $500 ($1 X 500shrs). If we sold those shares back it would be a total loss of $750 for the entire trade.
See the chart below for a visual representation.
Bull Call Spread
Another option trade that is a bit more complicated but less risky is the bull call spread. This trade starts out like our long call trade above except that at the same time we buy one call, we short another call at a higher strike to reduce the cost of the trade. The negative aspect of this trade is that we will cap our gains but the flip side of the coin is that we will reduce our costs to initiate the trade. Let’s see an example as it is easier to visualize. Let’s consider Biosante Pharmaceuticals (BPAX) which is developing Bio-T-Gel. This is a once-daily transdermal testosterone gel for the treatment of male low testosterone levels. With a market in the U.S. over $1.2 billion and a license to Teva Pharmaceuticals, the company is one of the top speculative choices for biotech investors. A NDA is pending with the FDA having a date of November 14, 2011. That being the case, here is the option chain.
As one can see, the call options are pretty active as we grow closer to the pending date with the FDA. After careful consideration let’s say you want to purchase a bull call spread in December 2011 and you want to buy the $2.50 call for $0.60 and sell the $3.50 call for $0.30. Let’s make it interesting and purchase 10 calls in total. So to buy 10 December 2011 $2.50 calls it will cost us $600 ($0.60 X 10calls = 1,000shrs). At the same time we sell 10 December 2011 $3.50 calls for $300 ($0.30 X 10 calls = 1,000). Our total costs will be $300 to enter the trade ($600-$300). Now here is what can happen.
• BPAX $1 on December 2011– This outcome is a big loser for the trade. The call sold at the $3.50 strike will expire worthless but so will the $2.50 calls we bought. Our total loss is the $300.
• BPAX $2.50 on December 2011– This outcome is also a big loser. The call sold at the $3.50 strike will expire worthless but so will the $2.50 calls we bought. Our total loss is the $300.
•BPAX $3.50 on December 2011- This outcome is as good as it is going to get for the trade. With BPAX at $3.50 on expiration day the $2.50 call options we bought are worth $1 ($3.50 pps – $2.50 call). The $3.50 calls we sold are going to expire worthless. Our net cost to enter the trade was $300 and the long calls are worth $1,000 (10 calls = 1,000shr X $1 per call) so our total profit is $700.
•BPAX $10 on December 2011- Once again, since we are short the $3.50 calls that is where our gains will be capped. BPAX could climb to $100 and it would not matter. The difference between the strikes we bought and sold is $1. Our out of pocket cost is $0.30 so our net profit is all but capped at $0.70. Since we have 10 calls that equal 1,000 share we have a $700 profit plain and simple.
See the chart below for a visual representation.
Long Put
Up to this point we have been reviewing how to use options to make money in the biotech world. Now let’s shift gears and see how to use options to protect gains one already has. There are a couple of ways to do it but the best is via the long protective put. If an investor buys a protective put, they are basically paying for insurance, plain and simple. The buyer is paying the seller a set amount of money so that the seller will be obligated to buy a specific number shares at a future date for a specific (strike) price. That concept is simple and easy to understand. If on the expiration date the price of the stock is above the strike price where the put is sold, then the put expires worthless and the seller gets to keep 100% of the funds that you paid him and does not have to buy the stock. If on the expiration date the price of the stock is below the strike price where the put is sold (and the option is not closed out by you, the buyer), then the put will be exercised and the seller of the put will be getting your share at the agreed upon price. Of course, as the buyer of the put you can execute the contract at any time before expiration if you so choose. Once again let’s see an example.
Let’s look at Oncothyreon Inc. (ONTY) which currently has one major play on their hands with the drug Stimuvax. Stimuvax is a therapeutic vaccine designed to stimulate an individual’s immune system to recognize cancer cells and control their growth in order to increase the survival of patients. ONTY has partnered with Merck KGaA of Darmstadt, Germany, who is developing Stimuvax under a license agreement. There are two Phase III trials of Stimuvax underway, and interim results are due by the end of this year. Back in 2009 ONTY was selling for less than $1 and I am sure many people who bought then are still holding shares today. With a closing price of around $6, they have netted a substantial profit already. The question is how to protect the profits as they await the results? One answer is to buy the put. Here is the option chain.
Speculative biotech stocks are volatile so option premiums are going to be high translating into expensive contracts. Our investor, buying shares at less than $1, has over $5 a share profit to protect. One option would be to buy the January 2012 $6 put for $1.80 or $180 per 100 share of ONTY they own. Is that expensive? Yes but here is the logic. If the results are outstanding and the stock soars to $10 then the increase in the stock price will more than make up for the cost of the put that will expire worthless. On the other hand, if the results totally fail and the stock price plummets to $2 a share, the put will kick in at $6 and protect most of the profits. In that case the put owner would receive $4.20 ($6 strike – $1.80 cost per contract) a share for the stock that is trading at $2 a share. On the surface it sounds terrible but just ask anyone long DNDN at $35 a share who woke up the next morning to find the shares trading at $12 if they wish they had puts.
Finally, after investors get a taste of options they want to start using them right away across all different biotech stocks. They are often disappointed though when they find out that lot of these stocks do not even have options. For example, consider the company AEterna Zentaris (AEZS) which shares the same exposure to the drug Perifosine as KERX above. KERX has actively traded options while AEZS does not have any at all. Or consider the company Antares (AIS) who is a small pharmaceutical company with a business line that focuses on self injection technologies and topical gel-based products. At first glance one would assume they would surely have options because of their huge potential, but that is not the case as they have none at all. The key point here is to make sure you have actively traded options available before just diving into a trade hoping they will be there when you need them.
In conclusion, this article is just a taste of the world of options and how they might be used in the speculative biotech investing world. There is no way that just one article could cover the gambit of all the different combinations and styles of option trades that exist. Before trading options, one needs to understand all the risks and rules associated with the trade. What I hope is communicated though is that without options, the biotech investor can be place at a disadvantage as they are not equipped with all the tools they need to give them the best chance for success.
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24
Oct/11
The Strategy Every Investor Must Use to Be Successful
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Fear is in the market. Look no further than the Volatility Index, or the VIX (otherwise known as the investor’s fear gauge) to see that the fear is palpable. However, opportunities are plentiful with the VIX trading at 45 – especially those of us who use credit spreads for income.
Why?
Remember, a credit spread is a type of options trade that creates income by selling options.
And in a bearish atmosphere, fear makes the volatility index rise. And, with increased volatility brings higher options premium. And higher options premium, means that options traders who sell options can bring in more income on a monthly basis.
So, I sell credit spreads.
Let me explain how valuable and imperative this strategy is to your long-term investment goals.
As we all know the market fell sharply in the beginning of August 2011 and the small cap ETF, iShares Russell 2000 (NYSE: IWM) traded roughly 18 percent below its high one month prior.
So how can a bear call spread allow me to take advantage of this type of market, and specifically an ETF, that has declined this sharply?
Well, knowing that the volatility had increased dramatically causing options premiums to go up, I should be able to create a trade that allows me to have a profit range of 10-15 percent while creating a larger buffer than normal to be wrong.
Sure, I could swing for the fences and go for an even bigger pay-day, but I prefer to use volatility to increase my margin of safety instead of my income.
Think about that. Most investors would go for the bigger piece of the pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush. Take the sure thing every time. Don’t extend yourself. Keep it simple and small and you’ll grow rich reliably.
Back to the trade.
Basically, IWM could have moved 9.8 percent higher and the trade would still be profitable. This margin is the true power of options
So, let’s take a look at the trade I suggested to TradeMaster subscribers using IWM. IWM was trading for $70.86:
* Sell IWM Sep11 78 call
* Buy IWM Sep11 80 call for a total net credit of $0.24
The trade allowed IWM to move lower, sideways or even 9.8 percent higher over the next 32 days (September 16 was options expiration). As long as IWM closed below $78 at or before options expiration the trade would make approximately 12.0 percent.
It’s a great strategy, because a highly liquid and large ETF like IWM almost never makes big moves and even if it does, increased volatility allowed me to create a larger than normal cushion just in case I am wrong about the direction of the trade. So, selling and buying these two calls essentially gave me a high probability of success – because I am betting that IWM would not rise over 10 percent over the next 32 days.
However, I did not have to wait. IWM collapsed further and helped the trade to reap 10 percent of the 12 percent max return on the trade. With only 2 percent left of value in the trade it was time to lock in the 10 percent profit and move on to another trade.
I am always looking to lock in a profit and to take unneeded risk off the table especially if better opportunities are available.
I bought back the credit spread by doing the following:
* Buy to close IWM Sep11 78 call
* Sell to close IWM Sep11 80 call for a limit price of $0.04
I was able to lock in 20 cents in profit on every $2 invested for a 10% gain in less than 5 days. Not too shabby.
So let’s review the benefits of the Options Advantage Credit Spread Strategy
Inherently, credit spreads mean time decay is your friend. Most options traders lose value as the underlying index moves closer to expirations. This is not the case with the credit spread strategy, as the underlying ETF moves closer to expiration and remains below/above the short strike of the spread, the strategy makes money.
1. The strategy is a one to two month trade that does not require constant monitoring of the market.
2. The strategy works in all market conditions (bull, bear, directionless).
3. Can make 5% to 15% a month.
4. Uses a diverse group of highly liquid ETFs
5. Enables you to determine your rate of success and the potential profit/loss and risk/reward before the trade is placed.
So please, get signed up now or my Options Advantage service. Learn the intricacies of how to effectively trade options. This is a new way to trade options, one that is essentially new to the retail public and it is my goal to teach anyone and everyone willing to listen how to use options in their daily investing lives.
There’s not much time left to secure your spot for this exclusive event.
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