Early readers may recall my strategy of getting paid to buy highly volatile stocks by selling covered calls. In particular, I cited the testing-stage small pharma companies as a group that throws off very high “synthetic dividends” due to their option volatility.
Today I added another one to the stable, even though I’m not finished researching it. I just felt lucky as we struggle to maintain day 7 of the Santa Claus rally (Dow Industrials only).
The reason (and I know this is silly) is the symbol – SNTA. What could be more appropriate for the season?
A former colleague pointed out Synta Pharmaceuticals when we were chatting about a month ago, and said he thought they had some interesting new technology in the “small molecule” approach to cancer treatment.
Not that I can claim enough expertise to judge their science:
“STA-9090 is a potent, synthetic, small-molecule Hsp90 inhibitor, with a chemical structure unrelated to the first-generation, ansamycin family of Hsp90 inhibitors (e.g., 17-AAG). In preclinical studies, STA-9090 has shown potency up to 100 times greater than the first-generation Hsp90 inhibitors as well as activity against a wider range of kinases. In in vitro and in vivo models, STA-9090 has shown potent activity against a wide range of cancer types, including lung, prostate, colon, breast, gastric, pancreatic, melanoma and certain haematologic cancers – as well as potent activity against cancers resistant to imatinib (Gleevec), sunitinib (Sutent), erlotinib (Tarceva), and dasatanib (Sprycel).”
I’d hazard a guess that only a few MB&B (Molecular Biophysics and Biochemistry) majors from my college years could have valid opinions of the science, when you come down to it.
I can see from the various news on the company that it seems to have been a serious cancer-killer in the petri dish, and didn’t kill patients outright when it was tested for safety. They are also approaching what may be a treatment for lots of kinds of cancers the way I like to see small drug companies operate — by taking on a near “orphan” disease, and testing in cases where all else has failed.
It also fits my criteria for market cap (under $200 million), so that even an orphan drug can increase the value of the company substantially.
Finally, it is so volatile that the options are expensive, with even the January at-the-money calls trading around 10% of the price of the stock. Unfortunately, there is almost no volume in the options.
Still, given the chart showing substantial swings in price, I have a pretty good shot at selling $5 calls with just a couple of months to expiry for 15% of my purchase price.
I should note that true bargain hunters would probably want to buy the stock around $3, the place the stock sat for months before it recent runup to $6.50.
On the other hand, any kind of encouragement from the new end stage patient testing will probably make $3 an impossible target. Even the $4 level where the stock hesitated for the last few weeks of November might be a better entry target for a buyer.
But hey, it’s in the spirit of the season. Besides, I’ll only buy a third of the position I’d consider if the stock had a chart that suggesting upward momentum rather than one that shows it in a correction.
So, fair warning — Santa is coming down, and may come down quite a bit farther before setting up for his next run. I own a half dozen of these kinds of stocks, and any one of them can turn into a major win if one the mega-pharma companies decides to do a little after-holiday shopping.