Merck (MRK, $37.14) has always been a tough stock to trade. It’s an investment in the Drug sector which carries extra risk due to the nature of their business. Drug and Biotech stocks trade on product announcements and development of their pipeline. Once different drugs are announced or “created” and start Phase I, II, and III of their process for FDA approval, these stocks can make huge volatile swings based on the news.
Merck fell more than 10% yesterday after the company said its cholesterol drug Tredaptive was not approved by the FDA. The company didn’t say what the FDA’s problem(s) were with the drug, but it’s likely it had something to do with safety concerns. This was a total shock to the market which had figured the drug would get approved.
Merck’s meltdown started in January and you can tell by the chart once the stock broke through its 50, 100 and 200-day moving average it was in trouble. Trading near $60 to start the year, the stock is now sitting at 52-week lows. That’s well over a 30% drop. Take a look at the chart and you will see exactly what I’m talking about.
The best option trade certainly would have been a put play on Merck once it broke through these averages back in January for three or four months out. Charts aren’t a sure fire way to make money but they are the single most important aspect of an option trade. There are numerous “other factors” we must consider when we trade options but it is imperative that you learn some aspect of how to read a chart.
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