Thursday, September 5, 2013

BIIB: Something new, a sideways play

Update 10/10/2013: The Congressional Republicans' threat to default on the national debt turned BIIB from a losing position to a profitable one. The subsequent movement of the party toward the tactics of negotiation rather than threat cut into those profits and prompted me to close the position immediately.

BIIB was a problem from the start. Less than a week after I opened the position, it shot to the upside, exiting the triangle and reaching nearly 8% above the upper maximum profit boundary of my iron condor options spread. That moved the position into a posture of maximum loss at expiration.

So when I cleared my holdings of bull positions, figuring that the political risk in Washington was mainly to the downside in the markets, I held on to BIIB, expecting that as fear of a default took hold, it would plummet back into the profit zone.

And so it was. It dropped back to the zone of maximum profit at expiration on Oct. 8. However, today, two days later, political developments in Washington that pointed toward a settlement prompted the price to rise again, and me to exit.

The stock showed a net rise of 1.7% over the 35 day life of the position, or 18% annualized. My iron condor spread produced a 14.8% yield on risk, or 154.1% annualized. It would have been considerably higher had the price stayed within the profit zone, but that was not to be. 

All in all, I'm quite pleased with the outcome. It shows that sideways trades on symmetrical triangles are a viable strategy. Once American politics has pulled back from its self-made Armageddon, I'll resume seeking out such trades.

Update: 9/5/2013: I said below that I likely would make adjustments to the stop/loss points as this position develops. How's 20 minutes after I formulated my initial plan?

The losses at the stop/loss points I described in the "Decision for my account" section below are greater than I'm willing to take. So I'm narrowing them to the break-even points for this structure, below $202.35 and above $232.65.

Note that these are soft stop/loss points. As I often do with spreads, I'll assess my risk/reward ratios if a stop is hit and see whether it makes sense to play the game a bit longer.

I last traded Biogen Idec Inc. (BIIB) in mid-May (read the write-up here). At the time it was a simple breakout in the midst of an uptrend.

I was stopped out of the position in early June as part of the development of a symmetrical triangle formation.
BIIB 180 days 4-hour bar

The last time I played a triangle, it went bad. (See my posting on MW.) I tried to pick the apex, by definition a hit or miss operation. In retrospect, I've concluded that triangles are best played through a direction neutral strategy that benefits from the passage of time.

That strategy is an iron condor, a net credit option spread that profits if the stock price remains within a certain range. Symmetrical triangles range-bound patterns, so the two appear to be a perfect match.

The downside is that my rules so far don't cover non-trending trades, so I'll be having to make up exit points on the fly.

BIIB broke above its 20-day price channel on Wednesday and confirmed the breakout this morning, before dropping back into the channel. This is typical triangle behavior, since the channel boundary is quite near the upper boundary of the triangle.

Biogen Idec is a biotech company that focuses on drugs to treat neurological and autoimmune disorders and cancer.

I'm going to rush through the financials, since little has changed since my last analysis.

Analysts are still positive, with a 10% enthusiasm index.

Return on equity still high, at 25%, and debt low, at 9% of equity.

Earnings are on the rise from the 4th quarter of 2012, with upside earnings surprises the last two quarters.

Institutions still playing heavily at 92% of shares, and the price has been bid up to where it takes $9.22 to shares to control a dollar in sales.

Volume is running at 993,000 shares a day, and of course still supports an excellent selection of options with three and four figure open interest and a front-month at-the-money bid/ask spread on calls of 2.8%, which is quite narrow.

Options are pricing in confidence that 68.2% of trades will fall between $248.97 and $204.39 over the next month, for a potential gain or loss of 9.8%, and between $215.97 and $237.39 over the next week.

Options are trading actively today, with calls running 97% above their five day average volume and puts 69% above average.

The fair-price zone on today's 30-minute chart runs from $226.13 to $288.64, encompassing 68.2% of trades surrounding the most-traded price, $227.29. The stock opened today above the zone and has since fallen below the most-traded price.

Biogen Idec next publishes earnings on Oct. 21.

Decision for my account: I've opened an iron condor expiring in October, short the $230 call and $205 put, and long the $235 call and $200 put. The zone of profit lies within the two short strike prices -- $205 and $230 -- which are roughly in line with the present boundaries of the triangle, $206 and $228.

The triangle will reach its apex in mid-November, which is well beyond the iron condor's expiration date.

There are no 10-day price channel boundaries that would work as exit points in this sort of structure. For directional trades, my initial stop/loss is set at double the 20-day average true trading range from the entry price. I'm adapting it to the iron condor by setting stops double the ATR above the higher short strike and below the lower short strike.

As I noted above, this is new ground within my present trading rules, so I shall no doubt adjust things as I monitor the position.

I won't update my rules yet, until I've completed this trade and thought through its implications.


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

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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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