When someone we know experiences a setback or a loss, its normal for us to feel a little down , as well. We express sympathy for that person. Humans have emotions and it seems like stocks do as well. Stocks can trade down “in sympathy” with a peer that has just given bad news.
Here is the story.
Eli Lilly (LLY:NYSE) shares hit the deck today after its Alzheimer drug study did not meet its goals. The drug does not slow memory loss and they will not seek approval of this drug. Consequently, the stock sold off about fifteen percent before the market even opened.
Biogen (BIIB:Nasdaq) is also in the process of developing a drug for Alzheimer’s, which is thought by many to be superior to the Eli Lilly offering. The fact that the poor trial results by Eli Lilly eliminates a competitor for Biogen, you would think that would bode well for the stock. Not exactly. Biogen (BIIB:Nasdaq) sold off more than nine percent before the opening bell. It was a pretty clear case of the stock trading down in sympathy with Eli Lilly (LLY:NYSE).
Here was the trade:
BUY 1 DEC 16 2016 317.50 CALL TO OPEN @ 5.60…..A COST OF $570.76
At this point the stock was trading around 297. It had already began to recover before the opening bell rang.
We closed out the position with this trade a few hours later:
SELL 1 DEC 16 2016 317.50 CALL TO CLOSE @ 6..85….PROCEEDS OF $674.23
Here are the results:
Initial Investment: 570.76
Proceeds on Closing: 674.23
Percentage gain: 18.13%
This trade is illustrating using just one options contract. Take that percentage gain and multiply it by 20, 50 or 100 contracts and this one concept can prove to be a wealth builder in the long run.
This article is not intended as investment advice and should not be relied upon as such. Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled “Characteristics and Risks of Standardized Options,” which outlines the purposes and risks of option transactions. This booklet is available at OCC – Characteristics & Risks of Standardized Options.