Long time blog reader Skeptic persuaded me to get out of a risky trade.
music selection: “Got To Be Real” — Cheryl Lynn
On 29APR2020, I sold a Biogen (BIIB) put with 21JAN2022 expiry at the 280 strike for 52.10 a share. At the time, COVID-19 was tanking the market and the ^VIX was at record levels. That made premiums fat. BIIB had fallen with the rest of the market to the 330 level and I felt it was a real bargain. I also felt that over a year and a half the markets would recover. It seemed like a no brainer to sell a well out of the money put on BIIB. I collect $5,210 for putting 28,000 of capital at risk in what looked like a safe way.
At the time, I was seeing lots of reports that Biogen’s Alzheimer’s drug looked to be a game changer. I believed the hype. When the drug was approved, I opened a bull call spread expect the initial pop to be followed by a steady climb or at least sideways movement. Shortly after I made that trade, news broke that multiple members of the FDA advisory board resigned in disgust over the approval. Seems, the drug is 1) arguably very dangerous 2) has no statistical proof of efficacy. In a week’s time I went from in the money to almost 20% out of the money. I closed to recover what little capital I could but took a greater than 90% loss.
After reporting that loss, blog reader skeptic left a comment about BIIB. That convinced me the stock was actually very risky. My short put was still deeply out of the money and was showing a strong mark to market profit. I decided last night to close this position today. I bought the put this morning for 9.40 a share. I profited 4,270 over 435 days. That is a 81.96% gain or 69% annualized.
Many of you have probably noticed the market is swooning this morning on higher than expected jobless claims. As of last night’s close, I was in the money on all of my spreads. As of this writing, my ITB bull call spread is threatened. If today were expiry, it would book a loss of 195 dollars. If the other positions expiring this month closed now, my total P&L for July would be a 10,295 gain. Much better than last month! I think ITB can rally to back in the money. Housing is super hot right now.
Big shout out to skeptic for his advice and expertise.
Devour your prey raptors!