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.

Recent trade on CHAP

I want to start off this morning with a recent trade that I made on Chaparral Steel (CHAP). CHAP has strong fundamentals and is growing at a good pace. I was watching the stock for a good entry point to make a very short-term option trade.

The following analysis is from Jan 10th and 11th.

I saw strong support at 43 from the old resistance in Oct, the break in Nov, and the bounces in Dec and Jan. The MACD has pulled back significantly from the previous uptrend and was providing a bullish crossover. The Stochastics were also low and providing a bullish crossover . This stock seems to have respect for the 30d SMA so my target was just below 46 (confirmed by most recent high).

I was looking at the stock as a 10% trade. The stock has great fundamental numbers and is in a longer term uptrend. The recent pullback to the 43 support area and the white candle following the hammers (confirming the hammer from the previous low) looked like a real nice bounce that could easily run to 45.5. With a possible 1 point move to resistance I could easily get a 10% move on the Feb 45 call (only 3% overvalued).

I ran the numbers and placed my orders at night BTO @ 2.00 triggering a STC @ 2.25 ... A 10% gain after commissions. The BTO was filled at the open (stock @ 44.12) and the STC was filled just 40 minutes later (stock @ 44.71). A nice confidence builder and an extra couple bucks in my trading account. Exact numbers = 9.8% gain on a 1.3% move. My flaws on this trade included no downside protection, I did not have a stop and a move against me would not have been avoided. The stock ended the day lower, but I had already taken my profits off the table.

The stock rallied the next day to close just below the 30d SMA which the stock seems to respect. A break and close above that level could trigger a new bullish trade on CHAP. It is more likely that CHAP will bounce off of that line and start a downtrend.