≡ Menu

Stopped Out Celgene (CELG) – Ouch!

No putting lipstick on this pig.

music selection:  “Sweet Caroline” — Neil Diamond (So Good! So Good! So Good!)

weigh-in:  203.4 (1.4)  – back on the wagon

I opened a diagonal call on Celgene (CELG) on 15AUG2017.  I had high hopes of earning a decent income while slowly building strong capital gains.  Since that time, CELG has had a promising new drug fizzle out in clinical trials and has reported a down quarter that included lowered forward guidance.  The share price has taken a beating.

My long call CELG190118C00055000 was purchased for 78.90 a share.  I discovered after returning from FinCon17 that I was stopped out and then some.  I sold this morning for 47.55.  I book a 3,135 short term capital loss.

In positive news, the UVXY puts are performing well and are nearing my exit target.  I should book around 2,700 in gains with an annualized return over 100%.

Devour your prey raptors!

{ 10 comments… add one }
  • Chris B October 30, 2017, 10:09 pm

    In hindsight, a straddle might have worked better for this company, with its sensitivity to binary outcomes.

    Also on the straddle theme, have you noticed that you can sell a UVXY Jan’19 at the money straddle for ~25% more than the value of the underlying. For this bet to lose, UVXY would have to more than double in 1.2 years. It could happen, but the odds would diminish with time as UVXY sheds more and more value, absent a major volatility event. You’d have to reset the position during reverse splits. Still, it seems like a low-risk way to earn low double digit annual returns.

    • The Lizard King October 30, 2017, 11:35 pm

      I plan not to be backward looking at Celgene.

      Your proposition of a straddle on UVXY is interesting. I wonder why you think it would be necessary to reset during r.splits? I’ve found the r.splits to be irrelevant to pricing and liquidity.

    • David October 31, 2017, 5:54 pm

      Whenever I find free money, I try and take the opposite trade and figure out how it would make me money.

      So I want to long the LEAPs strike 15 straddle for about 18$. Clearly I won’t make any money on the downside, minimal loss is 3$ if UVXY goes to 0. It will start to profit if UVXY reaches 33. The straddle should gain value if market thinks this is more likely to happen. This would be if we get a good spike or shift to backwardation. If you check simulated historical values for UVXY, it rose 5-10X over 1.5 year around 2008-2009. I can treat this as a binary event where I lose 3-5$ if trend continues and I can earn 50-100$ if market crashes. Good odds if I’m a doomsday theory fanatic.

      • Chris B October 31, 2017, 10:51 pm

        David,
        I agree if you don’t understand the ecosystem, you’re probably the prey. A long straddle would be a lotto ticket that would pay off in the event of a rare economic meltdown. The short straddle is like running an insurance company against such a catastrophe. Together, they explain why there is such an active market for these options. Of the two, I bet the insurance company strategy makes more money over time.
        It’s really intriguing to see a straddle with no risk on one entire side, a long record of winning to that same side, and a rationale for why it will go to that side.
        Plus, I suspect even a run-of-the mill recession, with 10% stock declines for example, might not be enough to outpace the combined time decay and UVXY decay of the short straddle.
        If the recession hits soon, you might wait it out. If it hits later, time and UVXY decay might have already wiped off enough value that a 7X spike breaks you even.

        • David November 1, 2017, 2:04 pm

          Problem with short options is you’ll get a margin call or early exercise during a spike. You don’t have the luxury of waiting it out for decay to do its work. You could hedge with a far OTM long call, but the 75 strike is going for 4.50. That will make the short straddle unprofitable on the downside.

          The other way to be safe will be to take a 10% position and leave the 90% in uncorrelated assets to cover a potential meltdown. You will be having very low returns.

          I wouldn’t touch free money that can nuke your house once per decade.

  • Chris B October 31, 2017, 3:47 pm

    Say you sold the straddle at the $16 strike for $20, and then UVXY declined to $8. At that point you’re happy because you’re very far away from the $36 breakeven point – which is the only breakeven point on this particular straddle.

    Then they announce a one-for-five reverse split and UVXY goes to $8×5= $40. Now, even though you’re only liable for 20 shares per contract instead of 100, you are $4 in the negative per share. ($40 current – $16 strike – $20 premium received = -$4). Chances are you could ride this back down to the breakeven in a few days, unless time runs out or a volatility event occurs.

    I’m sure liquidity/pricing would be fine, but the risk picture would be less favorable for the new options and I would exit if I had a fair amount of cash at stake.

    Do I have any assumptions wrong?

    • The Lizard King October 31, 2017, 4:11 pm

      Chris,

      That isn’t how a reverse split works. Your 16 strike would now exercise at 16 * 5 = 80. Splits/rev.splits never result in a net change to exposure. You’d have 1,600 in exposure pre-split (16 * 100 shares) and 1,600 exposure post split (80 * 20 shares).

      • Chris B October 31, 2017, 9:52 pm

        Schwab provides the following info with a useful table showing how the treatment of options during splits differs from reverse splits.

        Tl;dr – Splits involve both the strike and number of shares changing. Reverse splits only change the number of shares.

        https://www.schwab.com/public/file/P-3951800/INF57995_114923.pdf

        I was holding UVXY puts last summer, and suddenly found myself with adjusted options at my original strike but for a fraction as many shares. The net effect was minimal, but my risk exposure changed a lot.

        • The Lizard King October 31, 2017, 10:24 pm

          Chris,

          I’m pretty sure Schwab has this wrong. See http://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/

          I’ve held through multiple reverse stock splits of UVXY and I’ve never seen my premium make a 4 or 5X change as a result.

          If what schwab is reporting were true, there would be a mad scramble to sell puts and/or buy calls prior to the r.split date. It would be the biggest sure thing arbitrage opportunity of all time. And I’d be a zillionaire by now. You might try contacting schwab and let them know they have a rather embarrassing error in their educational material.

          NOTE: the strike per nomenclature will stay the same. UVXY190118P00005000 would become UVXY1190118P00005000. The only change is the “1” added in front in bold. So the contract looks like a 5 strike but is really a 20 or 25.

  • Chris B November 1, 2017, 4:11 pm

    I am seeing conflicting information from seemingly reputable sources. Like Schwab, the options industry council says the strike is not typically adjusted.

    https://www.optionseducation.org/tools/faq/splits_mergers_spinoffs_bankruptcies.html

    Here’s a memo from the OCC about the effect of a 2016 UVXY reverse split. It says no change to settlement price:

    https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.theocc.com/webapps/infomemos%3Fnumber%3D39306%26date%3D201607%26lastModifiedDate%3D07%252F12%252F2016%2B15%253A58%253A58&ved=0ahUKEwj-87KM353XAhVs0FQKHTurBaEQFgghMAE&usg=AOvVaw2bUl9njRtq8uA4VL1gX-i3

    However, I’ve also found SEC filings saying option strike prices are adjusted. E.g.

    https://www.sec.gov/Archives/edgar/data/1077814/000101287002004438/dex99a1n.htm

    It would make sense for the quantity and the strike to both be adjusted. I agree the math makes more sense that way. Whether we’re wrong or right, there seems to be a lot of misinformation about the subject.

    The confusion deepens…

    What do you see when you look up the UVXY December 2017 non-standard 25-share options at the $15 strike? Ameritrade displays an asking prices of 0.12 for the call and 13.80 for the put. Weirdness.

Leave a Comment

CAPTCHA
*