For the spread trader looking for large price moves, the pharmaceutical sector of the market can be intriguing. Orexigen Therapeutics is in that market, and you can see from the chart below that the prices varied from just over one dollar to $8 and more in the space of a year.
Orexigen was founded by Prof. Cowley, and he was also the Chief Scientific Officer. Working to develop obesity drugs, he took the company public in 2007 in order to raise $225 million to fund his programs. The main drug resulting is called Contrave, at least that is the trade name proposed for a blend of bupropion and naltrexone which appears to have potential. In clinical trials, the drug has proved effective, and was submitted for approval to the US FDA in 2010. Despite early approval, the drug was rejected because of possible cardiovascular side effects, and the FDA called for further testing.
Another pharmaceutical company, Arena Pharmaceuticals, had its weight loss pill Lorcaserin approved by the FDA in recent weeks, and surprisingly the stock price of Orexigen, ostensibly a rival, rose more than 20%, almost as much as shares in Arena. You can see the effect on the right of the chart, with the long line upwards. Not bad for a company whose drug was rejected a year before.
Of course, there is hope that Contrave will also be approved, if the cardiovascular effects of raising blood pressure and increasing heart rate can be reduced or discounted. Orexigen is already preparing further tests, but it is unlikely that the drug will be approved before 2014. Since Arena’s approval was the first for a weight loss drug in 13 years, it may be that the FDA is becoming more sympathetic to the genre, particularly as obesity is a growing problem.
This example shows how fickle the stock price of pharmaceutical companies can be. While there are opportunities to locate profitable moves, when spread betting you must take care to protect your capital and not over leverage your position.
Orexigen Therapeutics Rolling Daily
Orexigen is quoted on the NASDAQ Stock Exchange, and the current price for a rolling daily spread bet is 712 – 713. There are many analysts still saying that you should buy, but looking at the insider trading, several of the board members have sold some shares. It is usually safer to go by insiders buying and not selling shares, as buying is only for the one reason that they think they will go up – you can sell shares for many different reasons, such as paying off a mortgage or buying another car, but if as in this case several owners sell then you may become suspicious.
So if you want to go short on Orexigen you may choose to stake £5 per point at the selling price of 712. If you are right, and the price falls then you may decide to take your profits when it drops to 562 – 563. Working out how much you have gained from this trade, you take 563 away from the starting price of 712 to get 149 points. As your stake was £5 per point, you have made £745.
On the other hand, the share price may have gone up, and you would be left having to close your spread bet for a loss before the price went any higher. Perhaps you would decide to close your losing bet when the quote went up to 836 – 837. With a starting price of 712 and a closing price of 837, you would have lost 125 points, which is worth £625.
Many spread traders decide to take out a stoploss order when they place their initial bet, as this make sure that a losing bet will be closed, even if they are not watching the markets. Doing this, your bet might have closed at 776 – 777, which means you would have lost 777-712 points, or 65 points. That would be a loss of £325.
Orexigen Therapeutics Futures Based Spread Bet
It is important that you know what you’re getting into when you spread bet on a pharmaceutical company, like Orexigen. Their prices are typically driven by news in the market, such as in this case the approval or otherwise of a major drug that they want to manufacture. Unless you have inside knowledge of the workings of the administration, you may just need to see what the decision is and be prepared to act quickly. Far quarter futures based spread bets on Orexigen are currently priced at 710 – 735.
If you think that in the long run this stock is going up, you may want to place a long futures bet, staking perhaps £10 per point. If you’re right, then you might find that you are able to close out your bet when the price goes up to 895 – 915. Your bet was opened at 735, and it closed at 895, which means you gained 160 points. With a stake of £10 per point, your profit is £1600.
Of course, the price can go down as well as up, and at some stage you will have to decide to close your bet and accept your loss or risk losing more. Say it went down to 586 – 603, and you made the decision to cut your losses. Your bet opened at 735, as before, but this time it closed at 586. The difference between these is 149 points, which means you have lost £1490 on this failed bet.
It is often a good idea to place a stop loss order with your spread betting provider, so at least your losing bet will be closed when it reaches a particular level, whether or not you’re watching the markets and aware of it. Perhaps with a stoploss order your bet would have closed at 656 – 674. 656 from the starting price of 735 is 79 points, so in this case your loss would be £790.