Here at Traders Trading, we seek to entertain and educate. One of the best ways to learn to do something right is to learn from others’ mistakes. And learning from somebody else’s mistake can also be entertaining.
My worst trade ever involved a brother-in-law, a drug company, FDA approval of a drug, and out of the money call options. For you traders with any kind of experience you already know how this story goes.
About 7 years ago when I was first getting into trading my brother-in-law worked for a drug company that was waiting on FDA approval for an intravenous version of a commonly used drug. Let me absolve my brother-in-law of any wrongdoing or nefarious activity. He just happened to work for the company and that is how I first heard about it. He never once said I should get in on a great opportunity or anything else. This was all my doing.
Anyway, the FDA publishes dates of when they plan to announce the approval or not of a drug (PDUFA date) so I knew when this ‘certain’ (in my mind) approval was going to happen. So I loaded up on out of the money call options due to expire not long after the approval date. I used about half my trading capital to buy these options. I just knew once the approval was announced I was going to be rolling in the money.
The approval date came and the FDA issued a Complete Response Letter (CRL) which means they have some questions and the company has 6 months to address them. So no approval and the value of my calls was cut in half. Ouch. However, I now had a new approval date for six months in the future. So I sold my out of the money calls and bought some more out of the money calls that expired after the new approval date. Of course, I had to add more money to the trade to get the same number of calls.
I waited for the approval date and my calls even increased in value while I waited. (It’s called bio run-up. It’s a thing. Go search it.) Approval day finally arrived and the FDA approved the drug!! I was set! The next day the market opened and the stock price dropped! Buy the rumor sell the news. It’s a thing too dang it! My out of the money calls tanked. I ended up selling the calls for about 25% of what I paid. It wiped out about half of my trading capital. That was a painful and expensive tuition payment to Mr. Market.
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