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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Casaubon who wrote (9531)1/28/1999 2:40:00 AM
From: tuck  Read Replies (1) of 14162
 
Do take Herm's advice on the protective puts if you pull the trigger on this one. A lot of biotechs run up on speculation of imminent FDA approval -- and get clobbered when it actually happens! "Buy on the rumor, sell on the news." Seems paradoxical, but I've experienced it a couple of times and watched from the sidelines on several others. VRTX's chart indicates this is a possibility. I think one possible explanation for the phenomenon is that management is transitioning from a development stage company to a company trying to make money, and the street suddenly wonders if the company can do it now that it's been given the green light. How's the available cash versus the burn rate? The problem with big pipelines is that they take a lot of cash; the flip side of not putting all the eggs in one basket (read: one product). Even a delay in approval, say for additional data, can really strain a company that is struggling to make its cash last until it can retain some earnings.

The good thing about these swings is that it bumps up the time premium in the options you're going to sell against it. If you've looked at all of the above and feel management can execute the just ride along, rolling up and down as needed, and don't even think of using margin on such a company. Think of the stock as a vehicle for harvesting time premium, more than trying to make money on the stock itself.

Good luck, Tuck
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