Wednesday, April 3, 2013

APRI: Beyond the comfort zone

Update 4/23/2013: APRI broke below the 10-day price channel's lower boundary, $2.52, signalling an exit from the bull position entered on April 3. The position was structured as long shares.

The exit produced an 11.4% loss from initial entry. I added to the position three times, resulting in a 13% loss from the overall basis. Ouch!

In retrospect, the key to my decision to enter the trade is signaled by my use of the phrase "possible uptrend" in the lede to my analytical post. The prior high was, by a minuscule amount, lower than the highs that had come before. Had the price continued above that high, then it would have indeed been an uptrend. But that was not the case when I entered the position.

The take-away, I think, is that although the odds of a successful trade are an important tool in screening, the final trading decision must be based on the trends shown on the chart, and the phrase "possible trend" in a chart description ought to be a clear flag that the trade might not be a good idea.

(To my credit, I did label the trade speculative and noted that it took me "beyond the comfort zone". So I took the risk with my eyes wide open.)

Apricus Biosciences Inc. (APRI) broke above its 20-day price channel on Tuesday, producing a bull signal that suggests continuation of a possible uptrend that began Jan. 14 from $1.90. 

The price movement peaked at $3.42 on Feb. 11, corrected down to $2.38 on March 15, and since has, slowly, begun to work its way up again.

The trend has set a high and a higher low so far. It needs a higher high for confirmation, which means a break back above $3.42.

This is APRI's 15th breakout to the upside since the  broad markets began to recover in early 2009 from the post-recession crash. The 14 prior bull signals were profitable 55.6% of the time and produced an average yield of 16.8%. The losing trades on average lost 7.7%.

Adjusting the yield  by the success rate produces a score of 9.3%, well above the 5% minimum I prefer.

APRI has produced one bull signal previously during the current trend, for an 8.4% profit.

This is one of those days when the available trades take me far from my comfort zone.

Most of the survivors of last night's screening -- posted here -- fell by the wayside this morning. I removed the preferred stocks because I don't understand how they behave on the chart. One stock had an earnings announcement appear on the schedule and was cut because of my rule against opening new positions within 30 days of earnings.

And then, there were the bears. Smart mentors in the world of trading will make it clear that a trader can make money in both up and down markets.

That is certainly true, up to a point. The limiting factor is liquidity.

A bear position can be built in two ways: Either by selling a stock short, or by trading stock options.

Both methods require enough liquidity to support options having good open interest, and stocks traded actively enough so that the trader can borrow the shares used in the short sale.

So I removed the bear signals, leaving three symbols: SVXY, APRI and IGLD.

SVXY is a contrarian exchange-traded fund that tracks the VIX, a measure of volatility of the S&P 500 index. When the VIX falls, the SVXY declines. The VIX has been in an extended downtrend since October 2011, so SVXY has been doing very well indeed.

The problem is that the VIX tends over time to revert to the mean. It has had such a long decline and is trading so low that I suspect reversion is in the cards as the market corrects. That means a decline for SVXY.

Of the remaining two, I rejected IGLD because it has shown worse than even odds of success in its current trend.

Apricus Biosciences is a San Diego, California biotech company specializing in products to treat sexual dysfunction  The company on Monday announced it was selling "non-core assets" to focus on its flagship product, Vitaros, a topical cream used to treat erectile dysfunction in men, and the development of Femprox, a treatment for sexual arousal disorder in women.

(I'll leave aside the question of why these conditions are a "dysfunction" in men and a "disorder" in women -- the language is straight from the Apricus Bio news release.)

Normally I don't worry much about the company story behind a stock. But, with the cutting edge of largest generation in American history hitting retirement age, the Apricus Bio product line seems to be a perfect match for the demographics of our time.

APRI is followed by fewer than a handful of analysts. They are all enthusiastic about the company's prospects.

Clearly, they are a forward looking crew. Apricus last earned a profit in 2010. It has been loses only ever since, all with negative earnings surprises.

The return on equity is in the negative three figures and debt amounts to 52% of equity. In terms of current performance, Apricus is a highly speculative play. It's all about hope.

Institutions own 5% of shares, and the price has been bid up to an astounding level. It takes $9.77 in shares to control a dollar in sales.

APRI on average trades 81,000 shares a day. It has options but the strike-price grid is a lone place. There are only three strike prices in the front month (which is now May). Open interest, however, is in the three figures.

The front-month at-the-money bid/ask spread is 57%, far too wide for my taste. My vehicle will be shares if I decide to trade APRI.

Implied volatility stands at 90%, near the bottom of the six-month range. Volatility has been drifting downward since mid-March, although began recovering somewhat this week.

In the following discussion I use the term "68.2%". It is taken from statistics, where it is used as a measure of confidence in the results. One standard deviation is expected to encompass 68.2% of the results.

Options are pricing in confidence that 68.2% of trades will fall between $2.02 and $3.40 over the next month, for a potential gain or loss of 25.6%, and from $2.28 to $3.04 over the next week.

All of the options trading today is focused on puts, where volume is running at 93% of the five-day average. Call volume is only at 3% average volume.

The fair-price zone runs from $2.70 to $2.72, encompassing 68.2% of transactions surrounding the most-traded price, $2.71. APRI has traded entirely within the zone today, with the exception of a spike in the first half hour.

Apricus Bio next publishes earnings on May 6.

Decision for my account: I've opened a bull position in APRI, structured as shares. It's speculative, but the high volatility suggests a potentially high reward for the risk.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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