E Two Lessons From My Biogen Trade

On December 7, while reading Biospace, a site for pharmaceutical related news, I noticed an article on Biogen (BIIB). The news was about pending data from its clinical study in Alzheimer’s Disease with its experimental drug, Aducanumab. The data was to be presented in California on December 9, 2016, at an Alzheimer’s Disease conference. A few days earlier, Lilly (LLY) had dropped a bomb with the failure of its drug in phase III, Solanezumab. The stock had dropped 10% on the news, and I began to smell an opportunity with Biogen. I had no idea whether the data would be positive or negative, but based on market reaction to Lilly’s news, I expected the stock to swing by about 30 points in either direction. 

The stock was trading at $284 on December 7, 2016, when I made a trade. I bought puts at strike price of $280, expiring on December 9, for $4.40. I also bought calls at strike price of $285, expiring on December 9, for $5.00. My total cost per pair was $950, including commissions.

On December 9, the data was released. The stock gained about 5% pre-market, less than what I was expecting, and started drifting lower. Not wanting to spend the day chasing the stock, I sold my calls at 10:00 AM when the stock was at $305. The calls were sold at $19.6, netting a profit of $1460 per call. The puts were worthless, so I did not even bother selling them.

Later in the day, I was surprised to see that the stock had actually closed down by a couple of points due to safety concerns in the trial. So, my original hypothesis was incorrect, and the stock hardly made any move at all, whereas I was expecting a 10% change. However, I had a net gain of $1000 per pair of options, a return of 105.2% in two days. I learnt two things from this:

  1. One can be wrong and make money and be right and lose money. Naturally, it is better to be in the former camp. The reason I made money was because I got out of the position quickly after realizing my hypothesis was not going to pan out. So, don’t get your ego involved and get out quickly if things turn against you.
  2. There is a saying that one can be a bull or a bear but don’t be a pig, for pigs get slaughtered. I had my profits and I took it. If I had been a pig and got greedy for more, I would have lost money in both puts and calls, with a return -100%. So, take profits – no one got poor by making money.

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