21 Tips to Prepare for a Big Binary Event
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Both Vivus Inc. (NASDAQ: VVUS) and Arena Pharmaceuticals (NASDAQ: ARNA) have a major binary event scheduled within the next few weeks. Vivus' is July 17 and Arena's is June 27. For those who are not sure what a "binary event" is, the term binary is used often in bio-pharma and computer science (as well as other fields like astronomy) to denote duality. In bio-pharma the term is often used to denote a decision that is the ultimate goal of every bio-pharma company: FDA approval.
The stocks of both companies have rallied heavily ahead of their anticipated decision date. Aside from anticipation per se, the wait period gives investors a chance to weigh their possible actions (or inactions) with regards to the binary event.
Being a shareholder in Arena, I made a list of tips for myself that may or may not be of value to others and need to be assessed by each person according to their own research and appetite for risk.
- Stay off margin -- not only does borrowing money against your stock cost you interest, it jeopardizes having the luxury to hold the shares till the cows come home. Getting margined out on an unanticipated drop is no fun.
- Put your shares in a cash account (not margin account). It's best not to rely on a big variety of policies across different brokers, and make sure your shares are not used against you (by being lent for shorting) by holding your shares in a Type-1 (cash) account.
- If you get a letter from your broker asking to borrow your shares, tell him no. Lending your shares can yield you a bit of interest, but you'll make a lot more by the stock going up. Don't help the shorts hurt you. Help the short squeeze by not lending out your shares.
- Approval news is the wrong time to take profits. The hard reality that many hedge funds have been trying to ignore for so long is finally getting the seal of approval. Approval is the beginning of an increased level of demand, which will cause the price to increase.
- I expect some retail investors will take profit with the approval news. Millions of shares need to change hands between retail and institutions. There may be a temporary dip as market makers may try to get the retail shares at the lowest possible price. Mind you, it is much easier to influence retail sentiments than institutional sentiment; emotion -- fear and greed -- play a larger role with retail.
- Demand will far outweigh supply in the weeks and months following approval given a number of catalysts (see list here), e.g., European approval anticipated later in 2012, ROW partnership, etc.
- Once approval is granted many analysts will cover the stock and institutions will want to increase their small holding (my guess is it'll go from 26% to 60% of the float in the next 6 months).
- Stay away from options period. If I am sure of the science I don't need to buy insurance (puts), I'm not an insurance company so no need to sell puts, I am going to be patient (no need to buy calls), and I don't want to limit my gains (no need to sell calls).
- Given the huge short interest, short squeeze will continue for days if not weeks after approval. All the shorts who believed the bear analysts when Arena was below $3 are probably hurting!
- Any dip is a buying opportunity. Have dry powder.
- More people will buy than sell because with proper execution Lorcaserin could be a blockbuster.
- The company may dilute. Hopefully, they learned from the post AdComm offering and not rush into it (they could have done at least 80% better), not do it anytime soon, not use Jefferies, and insist on long-only mutual funds with low turnover. Any supply should be easily absorbed by a combination of institutional appetite and demand from shorts.
- Hedge funds that are short will probably go long once they have covered. This seemed to have happened with Dendreon (NASDAQ: DNDN).
- With approval, management can start negotiating from a position of power.
- Don't put stop-losses -- the wild swings in the last few sessions indicate stop-losses are more of a trap to take away your shares for cheap.
- Patience is a key to success. No matter what happens on PDUFA date, patience will help me succeed because I have sided with the science and truth, which will eventually prevail.
- Time is on the side of longs. There's no rush to sell. Market makers and shorts will want us to rush into taking profits because they need their cost basis minimized.
- Do not invest money you can't afford to lose or money you will need in the short term.
- It doesn't matter if the stock opens at 12, 15, 20, or 25. There is no rush to take profit because the direction is upwards.
- RELAX... Days leading to PDUFA do not need to be nerve wrecking if you look at the big picture.
- Position yourself financially to not need money from your stock for 6 months. This gives the company time to be properly valued, which I believe will be a lot more than at the PDUFA opening price.
As always, do your own research, smile, and enjoy the ride.
I am long ARNA. This article contains my opinions and should not be considered as investment advice. Please do your own research. To find out more about my interests please visit www.rezamusic.com. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.