Knife Catching 101

Maybe it’s the sense of being trapped in a bad weather pattern.

Maybe it’s the lack of progress on the next employment front.

Maybe it’s frustration with a serious after-holiday diet and exercise regimen (when the roads are clear enough to drive to the club with its lap pool).

Anyway, I got out my knife-catching gloves today, and started to position some stocks that I would like to own now to write calls on later.

Let me make this clear (again):

I have no special knowledge of these companies, or their technology.  Unlike mortgage REITs, where I will continue to maintain my current moratorium on comments, all my speculations in biotech world are just that — speculation.

I am not recommending them.  I have read some things that make me think each of them might be the next Dendreon or Elan, but you should know that I invested in those two stocks years before they became winners, and I was deep underwater in them before they turned a profit for me.  (After occasionally having huge paper profits which I failed to fully harvest.)

It’s that last point – harvesting the gains – that made me settle on the idea of investing in a whole collection of developmental drug companies and selling covered calls.

Even then, huge call option premiums may not be enough to protect me from mark-to-market losses.  Case in point – Arena Pharmaceuticals…..  I went long in the 5’s and 6’s and wrote $6 and $7 calls, and more than a few $6 and $7 puts, too.  When the stock got put to me and proceeded to drop below $2, I was deep underwater, since the option premiums only lowered my “cost” to $3.80 or so.

Having said that, I have averaged down to a lower cost, and written plenty of long-dated LEAP calls at $4 and $5 strikes.  I effectively lowered my cost even farther by doing that, and set myself up to make thousands if the stock takes off at some point.

The Arbitrary Panel at the FDA “suggested” Arena do some more lab mouse tests.  It infuriated long time bulls on the stock, and clobbered the stock back down to the $1.60 neighborhood from the $2 or so it had climbed to.

Another with a similarly disturbing chart is SNTA, my bizarro Christmas season stock.  With it, I’ve sold $5 and $7.50 calls.

Finally, I’m introducing a new name to this blog, Exact Sciences (EXAS).  I bought into it over the past couple of months due to interest and some reasonable sounding write-ups on other boards.  The idea of someone coming up with a way to show whether you need a colonoscopy sounds like a winner to me.  It also has some very handsomely priced options.  My initial purchase around $6 a share was paired with sales of $6 calls for April.

My most recent purchases down 40 cents or so are made with the plan to wait for a bounce, and then sell more $6 calls.  For the less adventurous (after all, the failure of the assault on Dow 12,000 and EssAndPee 1300 looks pretty ominous to the chartists), you could even buy EXAS today and sell the April $6 calls for 45 or 50 cents.  That means your cost basis would be closer to $5.20 a share, a level that should make anyone happy about getting called away for $6 a share in three months.

I’m a little more of a risk-on guy, so I’ll see whether the stock can rebound to its $6 trading range before writing new calls on the latest purchase.

So, to summarize, I’m catching these biotech knives with the intent of writing calls on them when they catch a trading bounce from their recent plunges.

I expect I’ll be able to sell SNTA $5 calls for more than a buck, even though it’s costing just below $5 a share right now.  For ARNA, I’m looking at the $2,50 and $4 calls as potential future sales.  With EXAS, it will be the $6’s, but I’d like to get closer to 75 cents a share in option premium.

If I make money on these, I have no doubt that it will be spent with carpenters in the spring, given the future water damage caused by the ice dams all around the perimeter of my antique house.  Something seems to have brought the northern branch of the jet stream way too far south this year, and unlike other years, it’s bringing moisture with it.  I just read that the Arctic Ocean had a record small amount of frozen surface for December, so that explains the moisture (snow) from every little wave that goes by.

It truly sucks when the “relief” is temps getting up to 30 degrees, followed by single digit freezes.  If we get another big coastal storm next week, the number of roof collapses around here is likely to spike.

And this is after having more 90 degree days last summer than we’ve had in very long time (four times the normal seasonal average).

I keep going out and breaking off the icicles, but the ice buildup on the eaves has got to be like parking a car at the edge of your roof, from a weight perspective.  I’ve even thought about getting a ladder and going out there with a blowtorch, but decided to pay the carpenters next spring instead.

hh

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12 Responses to Knife Catching 101

  1. Judy Sabin says:

    Beautiful photos!! Though destructive, those icicles are gorgeous. Of course, that’s easy for a Californian to say, right? 😉

    • hhill51 says:

      But wait! There’s more!
      Underneath that row of windows, the icicles I’ve broken off have formed an immovable two to three foot pile of clear blue ice. One that came down across the path I’d shoveled to get at them was so large I couldn’t move it (probably 250 – 300 lbs, six inches in diameter, about six feet long)….
      Far too late, I called everywhere to find a roof rake yesterday. All sold out. We’re already at three times average seasonal snow, and it’s not even February yet (when we usually get our biggest “dumps.”

  2. LB says:

    hh, your pictures show me you are loosing lots of energy through your roof. I’m from Minnesota and I see this alot. No easy fix, as there is limited space to place additional insulation. I’d make sure I removed some of the snow off your roof so no ice dams form and so the water does not leak inside onto your ceilings or down inside your walls.

    • hhill51 says:

      Already happening…. under that roof is a vaulted ceiling room. This is already a record winter, blowing away monthly records that go back over 100 years.
      The ice dams are already there, and already 10 inches thick at the edge of the eave. And yes, there are water spots in the plaster on the inside, along with a few window frames and door frames that are “weeping” their own icicles back out into the cold.
      We seem to be stuck in a 30 degree high, 10 degree low daily pattern that is just perfect for ice dam and icicle formation.
      The only positive is that the house has stood for 200 years, so it’s been through a few bad times in the past without falling down.

  3. Marc says:

    Played around with selling $7 Feb. calls on EXAS when it hit $6.40+ a week or so ago, but could not get 0.45 and didn’t want to drop to 0.40. Boy do I regret it now. Held SFI to so low I didn’t care anymore. Got to $4.75, sold Dec.5s. Went to 8 in a matter of weeks.

  4. William Kinsolving says:

    Ah, Howard, is this why people move to Florida? Our guest house ran out of oil and we had to bring in earth movers to clear a path through the drifts for the oil truck to get in. And there are no state taxes in Florida? (Yeah, but FLA is the pits, isn’t it?)

    • hhill51 says:

      Somehow I don’t think you would be happy in Florida. At least our state fires Governors when they’re crooks. Florida seems to find the biggest crook they can, and elects him.
      \
      Right now I think we’re paying a price for having such a warm winter and hot summer last year. More precipitation and the extreme southerly reach of the northern jet stream is probably caused by having so much open water in the Arctic Ocean this December.

  5. r3fman says:

    Can you say “stiricide”?

  6. Tassi says:

    I hear your problem Howard. Was in the construction business in Northern New England for decades, found that putting much less insulation directly at the eaves the heat escape would melt the ice. Think about it.

    Ciao……..tassi

  7. Bob Boyd says:

    Howard,
    As you know the ice dams at the edge of the roof are caused by your attic being too warm and the deep snow on the roof melting where it meets the roof, running down to the edge/gutter where it refreezes forcing remaining ice melt to back up under the shingles and cause water damage. There are two remedies. First insulate your attic from the rest of the house better so that the roof is cold enough not to melt snow when it is below freezing out. Another solution is gutter heating cable. This is relatively inexpensive and available at Home Depot and Lowes. It is run through the gutter and then draped in a zig zag pattern across the roof overhang with the length of the zig zags depending on the width of the overhang typically a ratio of 2.5 to 3 per linear foot of roof edge. Where the gutter is on a vertical wall then simply run the heating cable through the gutter. You may remember me from NFI days. . .
    Macro

    • hhill51 says:

      Thanks, Bob….

      As soon as the situation developed, I found a good source for those (had them on a house I rented in Massachusetts). However, having owned this house for 10 years, this is the first time we’ve had ice dams here.

      I suppose it came from the Arctic being so warm this winter and the resulting path of the northern jet stream moving right over us. It usually stays well north of here.

      Of course, once you have the ice dams, prevention is only possible the next year. While not a global warming skeptic (I really do think what we’re doing changes weather patterns) I have to decide whether the money invested today will be worth it vs. the risk. Perhaps when I find gainful employment….

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