Dear Momentum Options Subscriber,
One of my favorite sectors to trade is biotech, but it also one of the riskiest. Small biotech companies can be strapped for cash without many promising drugs in their pipelines. Larger biotech companies struggle with growth and generic copies once patents run out. However, the hunt for winners and pitfalls for losers is what makes the sector so dynamic to trade due to the wild price swings in the stocks.
In early January, I took a look at Relypsa (RLYP, $22.54, down $1.78), but I observed that shares would be volatile because the company would be valued based on sales of its drug, Veltassa.
Shares were pushing $28 at the time, and resistance was at $29-$30. Support was at $26-$24, and a “mini” golden cross formed in December when the 50-day moving average crossed above the 100-day moving average. However, the technical outlook worsened, as the 50-day moving average acted as major resistance.
The downtrend lasted through late February, which was followed by a stay in a six-week trading range. Shares recently touched a low of $11.60 in mid-March and closed Wednesday’s session at $14.51 — just below the 50-day moving average. Obviously, yesterday’s 67% surge in the stock has clearly made this a moot point despite today’s pullback.
Veltassa is an oral-dose drug that became available in the United States following FDA approval in late October of 2015. The drug is for patients who suffer from hyperkalemia, or elevated blood potassium levels, and is the first new treatment in more than five decades.
Analysts were absolutely giddy about the stock during in the back half of 2015 given the higher price targets and takeover chatter.
Wedbush raised its price target from $76 to $85 ahead of Christmas and kept an “outperform” rating on the stock. This followed another brokerage firm’s initiation of coverage on the stock with a $63 price target in mid-December.
Stifel kept a “buy” rating on the shares with a $40 target, but the firm said that the stock could fetch $75 on a buyout. There were two other “buy” ratings that came out on the stock in October and November as well.
At the time, the potential suitors or rumored companies said to be interested in Relypsa were AstraZeneca (AZN), Sanofi (SNY) and possibly Actelion (ALIOY).
AstraZeneca (AZN) bought ZS Pharma, a California biotechnology company, for $2.7 billion last November. ZS Pharma was Relypsa’s main competitor and had completed Phase 3 development of its own treatment drug for hyperkalemia. AstraZeneca will certainly seek FDA approval to bring this drug to market, as sales for Veltassa are expecting to quickly top $1 billion.
If AstraZeneca is unsuccessful in bringing its drug to market in 2016, Relypsa’s Veltassa will fill that void. Relypsa’s market cap was just over $1 billion in late January, which is why some analysts believed shares could double and possibly triple. AstraZeneca can afford to pay $1.5-$2 billion for Relypsa.
The market cap soared back to $1 billion following Thursday’s 67% surge in the stock. Shares closed Wednesday’s session at $14.51 and were halted at $15.86 during Thursday’s session at 12:46 p.m. EST.
Shares opened five minutes later at $19.50 after it was reported that Relypsa was looking over reviews for possible suitors. Thursday’s high reached $25.60.
The RLYP April 20 calls (RLYP160415C00020000, $4.00, down $1.10) closed Wednesday’s session at $0.06 and zoomed 8,400% after closing at $5.10. They reached a peak of $5.70.
I was targeting the RLYP May 20 calls (RLYP160520C00020000, $5.60, down $1.41) once shares cleared $15.75-$16 and the 50-day moving average. These options closed at $0.55 on Wednesday and ended just above $7 on Thursday for a gain of 1,174%.
Obviously, the takeover chatter picked up steam before shares crossed my technical buy level. The higher-strike call options have become extremely expensive following the developing news. I will likely still be on the sidelines when it comes to trading the options due to these factors and because the story is now being rehashed.
The one drawback for Veltassa is that it has a boxed warning label. The warning recommends taking the drug and any other orally-administered medication at least six hours apart. If not, Veltassa could blend with other oral drugs, causing a decrease in its absorption and a reduction of its effects. I’m not sure if this issue has been cleared up, so keep this in mind.
For this reason, Veltassa must be dispensed with a patient Medication Guide that explains important information about the uses and risks of the drug. Additionally, if patients don’t use it correctly, doctors may shy away from recommending Veltassa if another drug is more effective.
This is the downside risk for shares of Relypsa. I mentioned that the options were rich in premium due to volatility and the outlook for the company, and that thesis just got stronger.
I wanted to share this story with you to show that doing the homework does matter, which is why I spend countless hours researching and setting up possible option trades. Unfortunately, we missed the move back into the $20s and the massive option gains, but we are in a few other biotech stocks, including Inovio Pharmaceuticals (INO) and Merck (MRK).
Heading into the close of trading, the Dow is up 6 points to 17,548, while the S&P 500 is gaining a point to 2,043. The Nasdaq is lower by 7 points to 4,841, and the Russell 2000 is advancing 3 points to 1,096.
I have updated our current trades one last time, so let’s go check the action. I was hoping to get us into a New Trade today, which is why I’m running a little late. The bullish action has faded heading into the weekend, so I will be standing pat with our current positions. Have a great and safe weekend, and I will chat with everyone again on Monday morning.
Momentum Options Play List
Closed Momentum Options Trades for 2016: 37-6 (86%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 3:20 p.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the portfolio.
Inovio Pharmaceuticals (INO, $9.11, down $0.23)
INO May 10 calls (INO160520C00010000, $0.74, up $0.04)
Entry Price: $0.55 (4/6/2016)
Exit Target: $1.10
Stop Target: None
Action: Support is at $9-$8.75. Resistance is at $9.75-$10.
You can read my extended write-up on INO in the April 4 Pre-Market Update.
Merck (MRK, $55.15, down $0.26)
MRK May 57.50 calls (MRK160520C00057500, $0.50, down $0.11)
Entry Price: $0.33 (4/5/2016)
Exit Target: $1.00 (Limit Order on first half)
Stop Target: $0.45 (Stop Limit)
Action: Support is at $55. Resistance is at $57.50-$58.
Hertz Global Holdings (HTZ, $9.69, up $0.24)
HTZ May 11 calls (HTZ160520C00011000, $0.34, up $0.02)
Entry Price: $0.60 (4/1/2016)
Exit Target: $1.20
Stop Target: None
Action: Support is at $9.50-$9.25. Resistance is at $10-$10.25. I would like to see a rebound past $9.75 today.
You can read my extended write-up on HTZ in the April 4 Pre-Market Update.
Oracle (ORCL, $40.29, up $0.32)
ORCL May 42 calls (ORCL160520C00042000, $0.27, up $0.02)
Entry Price: $0.55 (3/29/2016)
Exit Target: $1.10
Stop Target: None
Action: Support is at $40-$39.50. Resistance is at $41-$41.25.
Editor and Chief Options Strategist