I had a good day trading Questcor Pharmaceuticals yesterday,
and it may contain lessons for other investors.
The drug maker got crushed after professional short-selling firm
Citron Research reported that Aetna was balking at paying for its
high-priced H.P. Acthar Gel. This was at least the second attack
by Citron on QCOR, and it drove the shares from Tuesday's close
of $50.52 to as low as $22.26--a drop of more than 50 percent!
Selloffs like these often present buying opportunities, so my
interest grew as the bloodletting intensified.
Step 1 was to study the long-term chart in search of support
levels. Where did I want to get long?
With the stock down around $30, I chose the $24 area because
that's where it bounced almost exactly one year ago. It was also
resistance throughout May and June of 2011. Originally
resistance, then support, it looked like a good place to make a
The next thing I knew, QCOR was below $23 and the shares started
to climb. By the time I was able to program my order, I was
filled at $24.28. Not perfect, but still less than half its
closing price the day before.
Step 2 was to choose my exit price. This time I looked to $34.50,
the last major support level from early August.
Step 3 was to choose the best strategy. Instead of simply selling
the stock, I wrote the September 30 calls for $5.10 against half
my position. That essentially locked in an exit price of $35.10,
$0.60 above my expected resistance level. (A little while later,
I sold the other half of my shares outright for $33.02, knowing
how much I'd hate to lose those gains.)
Selling calls made sense because volatility was spiking and
expiration is coming this Friday. That allowed me to profit from
other people overpaying for options, and from the natural decline
of time value at the end of their lifespan.
Another benefit of selling calls is that, for the remaining QCOR
shares I own, my cost basis is now $19.18. (That's the $24.28
entry minus the $5.10 from selling the calls.) If it rallies back
to $30 by Friday, I will exit will a gain of almost $11. Below
$30, the calls become worthless and I am long shares at a nice
discount. I can then dump them outright or sell more calls.
This was one of my better trades this year. I have made plenty of
bad ones, but in this case I thought readers would find it
informative to see how I used both chart levels and options to
slant the playing field in my favor.
QCOR closed at $26.35, down 48 percent.
I own a covered call in QCOR.
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