Best hedging strategy for low cost base owners

[harshal1981]

I have almost half of my MNKD investment at $2.2 cost basis and remaining at about $4.3. I was wondering if some of u experts can help me decide a reasonable hedge strategy for this positions. I have usually followed straight investments based on my DD on the technology and the market potential and so far it hasn't failed me miserably.. However looking at all the variables I was thinking I should may be try a hedge for MNKD ...

Any ideas / suggestions / thoughts are highly appreciated ..

[alcc]

I suppose you can consider giving up some upside on 50% your position to protect downside on 100% of your position by selling 1x Jan '15 $15 calls for ~$.95 and using proceeds to buy 2x May '14 $2 puts for ~$.40. You will have capped your gain at ~7x for half your position, however.

[harshal1981]

How do I factor in early assignment when I sell Jan 15 calls? In the case of MNKD it may be likely .. isn't it?

[babaoriley]

I don't think they'll get called early, even if the stock were to go above $15. Personally, I don't care for the $2 puts, irrespective of month, I don't think they afford the kind of insurance a long is looking for.

More to say, but no time now.  Perhaps as late as this evening.

[alcc]

If it's in the money, it'll get called. But why do you care when it gets called? You are out at $15 for those covered shares, as expected. A 7x gain on your $2.20 basis. You still have your uncovered shares left to ride as you wish. You can always buy more shares if you are bullish. The $2 puts are far out of money and expensive, I agree. But it is what it is. At least covers the worst case scenario of another CRL, which is what you want to do, I assume.

[harshal1981]

Alec: Appreciate your input.

Baba: Would appreciate if you can write more and finish your thought!

[babaoriley]

First, I believe sellers (“sellers” including people shorting and/or people just doing normal selling) have been the dominant force here for the last several trading sessions. Deerfield may well constitute a meaningful part of that selling, but that’s purely my guess. I would not for a minute blame them, given the position they are in.

Now, how long will sellers remain the dominant force? Don’t know the answer to that; it could be well past FDA approval, it could end tomorrow. I have consistently written here that a big time partnership was what we needed (“we” as shareholders, not necessarily the company) in order that the threat posed by the sellers would be muted (not eliminated, but muted). That’s not going to happen before the FDA approves – and that might allow the company to do much better than it could have done if it had taken my preferred route and inked a deal a month or two ago.

For shareholders, how nice it would be to be able to sell some shares (or otherwise protect) prior to AdCom, with the price of the stock being $7 or $8? Well, we may still find that out, but we’re less likely to find that out, than we would have been with a 600 lb gorilla committed to us.

So, given the above backdrop, here’s some stuff to consider.

1. Sell some shares anytime between now and March 31, being aware that if the briefing docs are released before or during trading on March 28 (that’s the date we’ve heard, anyway), there could be a overblown effect, one way or the other.

2. Wait till March 28 (do not sell before then), see where we are, and make a decision whether to act, or hold on to March 31.

3. See what’s going on March 31, and decide whether to act then.

4. You might decide, “screw it, I’ll wait till April 2,” the day after AdCom, and keep your fingers crossed that AdCom is favorable (see alcc’s excellent post re Exubera Adcom). If it is, I would suggest acting sometime during the first hour of trading on April 2. I would not be the least bit surprised to see the stock pop up materially in pre-market, and very early in the session, then fizzle.
“Acting” – to me, that means doing one or more of the following things: selling some shares, selling covered calls against some shares, or buying some puts.

Unless the price of the puts all of sudden starts to surprise me, the only time I would consider selling puts would be after number 4, above, because, with a price spike as hoped for, the put prices will get a little cheaper, and then possibly worth-while, but I’d look more at $4 strike and check out the difference in price between nearer months and further; it may be worth it to go to August, or even January.

If we get a positive AdCom, I might well sell some shares (or warrants) during what I’m assuming will be the spike within the first hour (irrespective of whether I've "Acted" prior to that date). I feel that in that event, I will be able to buy some or all of those positions back cheaper when the inevitable hit pieces sink in, and people start to sell, and once traders are convinced the stock isn't going any higher until nearer the PDUFA date.

I'm afraid if you wait till after AdCom, and AdCom is rough, then I believe it's going to be very difficult, or at least, very painful, to protect oneself. If we go into AdCom at $6.50, I could see us open around $3.50 if the AdCom vote is thumbs down. Even a 50/50 vote will be viewed as negative (I know we on this board will view it as such) - I think we need to have no more than 3 dissenting votes in order for the stock to have a decent shot at going up the next morning.

[babaoriley]

A bit more:

While days like today (speaking of March 6) are not fun, we all have to understand and acknowledge that MNKD is a stock that has attracted an enormous amount of big money gamblers. Many of them who are short, do not know 10% of what people on this board know about MNKD or Afrezza, but that does not increase our chances of approval.  Nor does the fact that hit pieces come out and/or the fact that the share price drops decrease the chances of approval.  Unless it's rigged, then these price fluctuations say nothing about our chances for approval.  If it's rigged, well let's just hope it's rigged in our favor!! 

The vast number of shorts and the vast amounts of money at stake tell me that MNKD stock is not going to have an easy time going up a whole lot, even if everything turns out positive, including FDA approval - until a favorable partnership is announced.  Who knows, maybe Al will surprise the heck out of us (me), and one will be announced before AdCom; but I'm certainly not planning on that happening.

Bottom line, the easiest thing to do to protect yourself is to sell some of your long holdings, the toughest thing about that, is figuring when.  I hope the above is helpful.