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This stock got absolutely rocked on the news of no FDA approval yesterday. The sad part to me is that alot of the people that were holding were sitting on fairly significant gains already, because i think most people got in between $10-$20 in anticipation of FDA approval.
What I can't for the life of me understand is WHY DIDN'T ANYONE PROTECT THEIR POSITION!?!?
As an example:
The stock was at $45 the day before the news was due to come out. All option prices I'm quoting are closing prices on the day before the news (5/4/2010).
Why the heck wouldn't you put a collar on something like this, give yourself some (MORE) upside gain while protecting the profits you already made:
assume you were late to the party and didn't get in the stock till $20 you're still sitting on a double.
additionally assume you expect a 25% move either way.
SELL the MAY $55 Call for $4.75 (55 call is 22% increase from 45)
BUY the MAY $35 PUT for $5.80 (35 put is 22% decrease from 45)
So for $1.05 you can protect your stock and either participate in an additional 22% gain or cover your tail and still lock in $15 of gains from your initial investment.
I just can't understand the gambling mentality of letting huge gains ride on something like an FDA decision. maybe this will prove helpful to people the next time they try to invest in a biomed FDA play.
Best of luck to all trades, may the $$ be with you!!
Happy Trading
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