Arena Pharmaceuticals is a classic example of a pharmaceutical company and the way that drug approvals can affect the stock price. If you had chosen to spread bet on it in recent weeks, you could have been making a fortune, assuming of course that you played it right! Here is the latest chart: –
You can see that after spending a long time around the 200 level, the price has reached nearly 1400 in a matter of weeks. The reason for this is clear, but where the price will go in the future is still uncertain.
The reason for all this price activity is that the US Food and Drug Administration (FDA) has just approved the use of lorcaserin, an obesity drug developed by Arena. Obesity, particularly in the United States, is a massive market and makers of effective drugs can expect to generate immense profits. This is a classic example of “trading the news”.
It is not certain where the price of Arena Pharmaceuticals will go next. Many observers think that the enthusiasm has been irrational, particularly as some recent studies have shown that the drug only gives 3% or 4% reduction in body weight. In addition, a competitor, Vivus, has a drug called Qnexa which is scheduled for review and possible approval in the next few months. A price of perhaps $12 per share may be an appropriate level right now, but it would not be surprising to see this price sink as time passes.
The next milestone for Arena, assuming final approval from the FDA in the next few months as expected, will be approval in Europe, but this is not expected until 2013.
If you can identify opportunities like this in advance, it could be worth spread betting on the jump in price. The downside is limited, should approval not be given, and the upside is many times the possible loss. However, unless you have some instinct or insight into the approval process, you could be throwing away money.
Arena Pharmaceuticals Rolling Daily
Arena Pharmaceuticals has been going through some exciting times recently, following approval of one of its drugs. This leaves you with the choice of spread betting long, that the price will continue to explode, or taking the short side, on the basis that the price went too far. Either way, be sure to protect your capital and close your bet quickly if it goes against you.
The current rolling daily price for Arena is 1116.3 – 1119.7. If you want to take a bearish view, betting that the price will go down, you might stake £2 per point at the selling price of 1116.3. If you’re right, you may choose to close this spread bet when the price is quoted at 953.7 – 957.1. As this is a short bet, it closes at the buying price of 957.1. That means that you have made 1116.3 minus 957.1 points, which is 159.2 points. For your chosen stake of £2 per point, you have won £318.40.
If Arena surprises you, and goes up, then you may be faced with having to close your spread bet for a loss. Perhaps it may go up to 1243.6 – 1247.0, and you close your trade. This time, your exit price is 1247.0, so you have lost 1247.0-1116.3, which is 130.7 points. That would cost you £261.40 for your bet.
As a third example, suppose you decided to place a stop loss order when you made this trade. Many spread betters like to do this, as it means their losses are limited, even if they are not watching the markets. Suppose your spread betting provider closed the bet, obeying your stoploss order, when the quote was 1192.1 – 1195.6. The starting price was 1116.3, and the closing price was 1195.6, a difference of 79.3 points. With a stake of £2 per point, your loss in this case is down to £158.60.
Arena Pharmaceuticals Futures
If you want to take a longer view on the share price of Arena Pharmaceuticals, you might consider a futures based spread bet. The current pricing for the far quarter, which is eight months away at the moment, is 1116.9 – 1130.4. If you think that good news will boost the price, you might place a long bet for £3 per point.
Possibly, the price will creep up to 1352.6 – 1365.2, and you’ll decide to close your bet and collect your profit. Working this out, your long bet was placed at a price of 1130.4 and closed at a price of 1352.6. That means you gained 222.2 points. With a stake of £3 per point, you would have won £666.60.
It is good to know that even with a futures based bet, you are free to close the trade any time you want to. You may place the bet and it immediately goes into a losing position from which you need to exit to cut your losses, say to a price of 957.6 – 970.5. Your exit price would be 957.6, which taken away from your entry of 1130.4 means you lost 172.8 points. Multiplying this by your stake, in this scenario you would have lost £518.40.
Many spread betters decide to use stop loss orders to protect their positions. This order is usually placed at the same time as taking out the bet, and it tells your spread betting provider to close the position and fix your loss if the price falls to a certain level. If you had considered placing one on this bet, you might find that your bet would be “stopped out” for you at a price of 1030.2 – 1042.3. The opening price was 1130.4, as before, and this time your bet finished at 1030.2. 1113.4 minus 1030.2 is 100.2 points. For your chosen size of stake, you would have lost £300.60.