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>PUT PROTECTION FOR

YOUR INVESTMENTS
>BIOTECH & PHARMA
STOCKS

Akash
Miriyala
12/3/13

WHAT IT IT?
A risk-management strategy that investors can use to
guard against the loss of unrealized gains. The put
option acts like an insurance policy - it costs money,
which reduces the investor's potential gains from
owning the security, but it also reduces his risk of
losing money if the security declines in value.
You can confi dently participate in the possible
upswing of a stock while hedging with a put option.
Do this by investing a percentage of your base in
puts.
Otherwise sell with a stop-on-quote to protect against
losses: viable option, but you have to recognize the
possible bottom prices either way.
http://www.investopedia.com/term
s/p/protective-put.asp

EXAMPLE
Suppose you had initially purchased 100 shares of
stock XYZ @ $50 per share. Four months later the
stock is now trading at $80. You have an unrealized
profi t of $3000.
Instead of selling, buy a protective put to protect
unrealized gains. A put option gives its owner the
right, but not the obligation, to sell a certain stock at
a specifi ed price on or before a specifi ed date.
Instead of selling shares you would buy a Put option
with a strike price of $80. You've now locked in your
gains and have the "right to sell your stock" for $80.
Of course you have to pay a premium (the cost of the
option). For this example the put is $400 ($4 *100
shares).

RESULTS
Suppose the price fell to $30 (you bought at $50). You exercise
your option at $80 (*100shares) ea rning $80 00.
As prices rise, buy puts with higher strike prices to protect more
of your gains.
REAL example:
LNKD last price = $216.43, Buy put with strike $205, expires Dec
27 t h for $3.70 each.
Bought 100 shares for $21,643 + $370 (100*$3.70) = Thats 1.7%
of your base to protect for almost 4 weeks

SO WHAT?
Pros Hold on to stock as prices rise rather than cashing
out to guarantee gains.
Cons Costs of puts will eat into profi ts, option has limited
lifespan and must be renewed (buy more options after
expiration), or set a lower strike price
In the end, I didnt end up buying options and sold my
shares in LNKD. But I think this strategy is a good one to
try.

BIOTECH & PHARMA STOCKS


Characteristics:
Pretty volatile
Dependent on drug patent registration, FDA clearance,
patent expirations.
Tend to have high expenses in time leading to the
completion of a drug and before it hits the market.
Once a drug hits market, the company has guaranteed
asset for some time.

WHY BIOTECH/PHARMA?
Tend to be trackable and transparent.
In the midst of having many registered drugs going
strong, these stocks off er fair dividends.
Growth potential for younger pharma companies just
hitting the market (HZNP, GALE)
Competition is widespread, no drugs are the same.

OTHER STUFF TO KEEP IN MIND


Some pharma companies provide discounted drugs
for impoverished populations: HIV in Africa, etc.
There are high expenses due to R&D for a new drug.
Creating, testing, then registering for a patent is a
long process, sometimes takes years to pop.

INDICATORS OF GROWTH
Successful clinical drug trials
Guaranteed sales of in-patent drugs
Deep pipeline of drugs foreshadows future growth
areas
Research & Design
Testing
Patent Acquisitions

CONTINUED
Horizon Pharma Like GALE is another young
pharmaceutical company. Both remind me of earlier
stage large-cap pharma stocks (AZN, GSX)

INDICATORS OF RISK
Competing brand name drugs
Rising use of generic brand drugs
Patent Expirations:
Leading to reliance on other drugs manufactured (higher
burden)
Increased pressure on success of drugs in process

Others to watch: AMGN, SHPG