SPN Bearish Head and Shoulders

I have stopped watching Superior Energy Services (SPN) for a bearish position. The stock dropped to, but failed to break underlying support at $29. It looks as though we have missed the bearish opportunity with both the MACD and Stochastics bottoming out on the daily chart. SPN will be announcing earnings on Feb 26th, so we may get a pre-announcement move this week in either direction. Some people call the straddle a non-directional option strategy, but I like to think of it a bi-directional option strategy. You make money if the stock moves up big or down big. The current March 30 straddle is listed at $2.30 and pretty fairly priced with a little extra weight on the call side. A quick move above $32.30 or below $27.70 would be profitable. That size move is possible over an earnings announcement.

By examining the 5 month chart of SPN, we can see the formation of a head-and-shoulder pattern. The drawn lines identify the shoulder line and the neck lines with an obvious head right in the middle. If this pattern confirms by dropping below neckline (which corresponds to our underlying support), the targeted move is approximately 6 points into the $22-23 area. It's interesting how that matches up with the low on the chart back in Sept. Remember that all patterns need confirmation, and the confirmation of a head and shoulders pattern is a break of the neckline.

I have now discovered two possible strategies for SPN. The short-term earnings straddle would allow for a break in either direction, but requires a quick move to take advantage of the March options. The other strategy is to take the short position in anticipation of the bearish break. A longer term option would be required to take full advantage of a move to $23 or lower. The Jun 30 put is currently at $2.40 at would be valued at better than $7.00 if SPN hits $23 for a 200% return. The June expiration gets us plenty of time for the move to be completed without a major hit to the time value.

CBRX Celebration

Ridgeland, MS, FEB 05, 2007 --
Columbia Laboratories Inc (CBRX) shares, down 70%, where falling on news that its Phase III clinical trial of progesterone for the prevention of preterm birth in women with a previous preterm birth earlier than 35 weeks gestation did not achieve any reduction in the incidence of preterm birth at week 32, the primary endpoint, or at weeks 28, 35 and 37, secondary endpoints of the study.

Let me qualify my celebration after reading the above news clip. I certainly do not celebrate the failure of a drug that could prevent preterm births. What I celebrate is the after 4 weeks of waiting for the results of the clinical trials, my straddle on CBRX paid off.

I opened a March $5 straddle on Jan 3 after reading an article about the expected announcement some time in Feb. My experiences with Drug companies tells me that these clinical trial can make or break a company. The only safe way to trade this would be to bet on a big move in either direction. If you don't understand the option straddle strategy, I suggest searching Investopedia. (I've included a search box on the left)

My original purchase of the March $5 call and the March $5 put cost me $2.60 total. Obviously I was expecting for a big move in either direction. With the stock at only $5.00, I know my downside would be limited but my upside could be huge. My hoping that my calls make a ton of cash and the puts become worthless.

The stock moved sideways for 4 weeks at a price just below $5.00 and the lower volatility and the time value eating away, I was starting to losing money on both options. That's the way is is with a straddle, if the stock doesn't move, you lose money.

Yesterday the stock gapped down 70% and 22 million shares traded at $1.50. This is more than a 3300% volume spike. For the novice, this is a sign that the company has some bad news. I will be closing my March $5 put this morning for $3.50 for a 34% gain in 4 weeks. I will hold the March $5 call and let it expire worthless.

If you are going to play with drug stocks, play both sides.