Monthly Archives: June 2014

JAKK Jun20’14 10 PUT roll

With the June option expiry coming this Friday, 20 June, it was time to see what puts are expiring worthless, and what might result in stocks being put to me. One put that would not expire worthless was the 6 JAKK Jun20’14 10 PUTs that I was short. The other 6 JAKK Jun20’14 7.5 PUTs had a good chance to expire worthless with JAKK closing at $7.79 on the 18th.

With regard to the puts at $10 strike, I could either let the stock be put to me and hold a long stock position, or I could roll my position. I decided that I’d rather roll the position to July and no cost, or a small credit. This is partially because the stock would be put to me at an effective buy price of $8.10, which doesn’t reflect any discount to the current trading price.

I first placed an order to roll the contracts to July with a credit of $0.20 per contract. After a few days, the were not filled so I changed the order to a $0.05 credit and then at even money. I managed to roll 2 contracts at a $0.05 credit on the trading session of 16 June and the remaining 4 contracts at even money on the trading session of 18 June.

Effectively, I didn’t make or lose money at the roll. Given that the contracts were going to expire in 2 trading sessions, I think it was fair enough.

I’m uncertain that JAKK will rise to <$10 by the July expiration date, but hopefully it will rise back to the $9 levels that it traded during LH Apr to FH May. That would probably be a good time to take profit.

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SPY Puts

Last night, the FOMC was to make their meeting announcements. There was some hawkish rumours that the Fed would raise rates earlier than expected or cut the bond purchases faster than the market expected USD10billion/month. This made me err on the side of caution. However, my portfolio hedging since early 2012 has generally not turned out well since the market has been on such a strong uptrend.

Thus, I bought 5 SPY Put Jul’18 14 191 @ $1.50 and 5 SPY Put Jul’18 14 192 @ $1.20, for a total outlay of $1350.

The FOMC meeting announcement was late at night my time, say 2 am. Surprisingly,  I was woken up by an extremely loud and heavy thunderstorm. I then saw a Bloomberg alert on my iPad that mentioned that the Fed was continuing with its $10billion taper. It took me a few moments for me to realize what had happened, and I then fired up my laptop to close the position. As a result, I sold 5 SPY Put Jul’18 14 191 @ $1.13 and 5 SPY Put Jul’18 14 192 @ $1.34. This was probably the first time that I used market orders on IB. Thus, I lost a total of $115 on this trade, exclusing commissions, which is much less than what would have happened if I hadn’t been woken up!

Orexigen Therapeutics (OREX)

Orexigen Therapeutics is a drug discovery company that focuses on drugs that combat obesity. The company has a new anti-obesity drug called Contrave, who’s Phase III trial results were expected to be released on June 10. The drug was initially denied by the FDA in Feb 2011 and the firm was told that the application would be reconsidered if it sponsored a clinical trial that demonstrated that obese patients taking it did not have a significantly higher risk of suffering heart attack, stroke, or cardiovascular death than those who did not take the drug. The company then resubmitted the drug application in Dec 2013 after a successful light study and the company announced it had reached the interim target laid out by the FDA.

Other anti-obesity drugs such as VVUS have not done well. However, I was optimistic on Contrave because Takeda, a large Japanese drug company, had entered into a partnership with OREX. Under the terms of the agreement, Orexigen will receive an upfront cash payment of $50 million from Takeda, and Takeda will obtain an exclusive marketing right from Orexigen in the United States, Mexico and Canada while Orexigen retains the right to co-promote with Takeda in the United States. Orexigen will be eligible to receive payments of over $1 billion upon achieving certain regulatory and sales-based milestones. Assuming Contrave is commercialized, Takeda will pay tiered double-digit royalty payments on net sales in the Territory. Under the terms of the agreement, Orexigen and Takeda will work together on ongoing development of the product, with Orexigen leading pre-approval activities, and Takeda leading post-approval activities. The parties will share in the costs of any future development of the product. Also, my friend Shawn had a friend who worked at Takeda who said that Takeda was very optimistic on the future prospects of Contrave, though he wasn’t working directly on this project.

One risk factor, highlighted by my friend David who is a pharmaceutical analyst at Morningstar, is that the FDA has been very strict on obesity products. Since they believe there are safer alternatives (diet and exercise) that do not have potentially bad side effects, they aren’t very willing to accept a drug that has some potential side effects. Its not like oncology, where they are way looser. They allow a decent amount of side effects since for most of these products there are no other treatment options.

Given the information available, I felt that it was more likely that the FDA would approve Contrave and anticipated that the stock price would pop once the approval was announced.

On 20 May, I purchased 1 call option at a strike of $6 and with expiration on Jul 18 2014 for a premium of $0.65/contract. This was actually a mistake, and I meant to purchase 10 contracts.

On 28 May, I purchased 10 call options at a strike of $7 and with expiration on Jul 18 2014 for a premium of $0.70/contract. I didn’t purchase the same contract that I had previously, because the stock had already gone up by ~$0.30 and the option by ~50%.

On 29 May, I purchased 10 call options at a strike of $8 and with expiration on Jul 18 2014 for a premium of $0.40/contract and a further 10 contracts on 10 June for $0.50/contract.

Before the FDA ruling, I had a position that had cost me of about $1600. I chose to go for a long call option position because I would cap my loss of the position at the total premiums paid, while I would have extra leverage in the event that the stock popped. While the implied volatility for the options were high, I felt that the stock would move by more than the strike+premium paid price, if my thesis played out. I felt that this strategy would provide the best risk-reward.

Unfortunately, the FDA decided to postpone their decision. Upon announcement of the news, the stock fell from $6.81 to $5.81. The options that I purchased all fell precipitously in value, with the higher strikes falling more than those at lower strikes. I would have lost less percentage-wise if I had bought the stock, but I lost less absolutely, since I would have had to buy more stock in order to achieve a meaningful return. Thus, I still stand by my decision to purchase long call options.

I’ll probably play the situation again in the same way when the FDA’s decision date comes again.

Lexicon Pharmaceuticals (LXRX)

Another legacy holding of mine is Lexicon Pharmaceuticals (LXRX). I first purchased this stock when I was still an intern at Morningstar, under the advice of one of the strategists there. I have since traded in and out of the stock as it has gone up and down.

LXRX is a biopharmaceutical company that uses its unique mouse genetic technology to discover drug targets, develop them, and bring them to market. The company uses Nobe-prize winning technology to isolate genes, then remove, or “knockout” those genes from an animal’s genetic structure. The genetically engineered animal can then be used to model the effects of a drug blocking that genes product. The company has an extensive collection of “knockout mouse”, since mice have a more similar genetic structure to humans. The company believes that by using their knockout mice to discover drug compounds that can then be extrapolated and adapted to be used on humans, the drug screening process can be sped up and also be made more effective.

Using this mouse knockout technology, the company has so far discovered several drug candidates and brought them to midstage development. Two of these are already in the late-stage pipeline – LX4211 in diabetes and LX1032 in carcinoid syndrome. Since I had earlier bought and sold the stock in 2011, the company has started to shift its strategy. Instead of finding drug targets, the company is now focusing on gaining approval for its drug candidates. Also, the founder was replaced as CEO in June 2014 with Lionel Coats, who has 18 years of experience at pharmaceutical company Eisai. He should be able to bring his experience at Eisai to help LXRX commercialize its drugs and form partnerships with bigger pharmaceutical companies.

I see this as a investment that is uncorrelated with the broader market and a low risk but potentially a very high reward, Unfortunately, it is also a low batting average investment. I see the company’s shift in strategy and new CEO as evidence that the company is progressing from an extremely early-stage drug development company with a novel technology, to one that is more established and has more credible technology. If LXRX is able to win FDA approval for any of its drugs, that would be evidence that the mouse knockout technology is effective and could potentially revolutionize the drug discover and development process.

I have an existing 1000 shares position in LXRX that I purchased on 24 March 2014 at $1.65. Now that the stock has come down further, a limit purchased order for another 1000 stocks were purchased at $1.30.

Morningstar FVE – $3
Uncertainty Rating – Very High
Economic Moat – None
Consider Buying – $1.50

I would look to sell the stock at $2.5-$3 and then look to buy the stock back again. One reason why the stock price hasn’t moved since I first purchased it in 2011 is because of the equity dilution as the company raises cash by selling stock. Thus, I do not see this stock as one to buy and hold, but one that has to be traded in and out of.