Strategy thought |

Strategy thought

Just spoke to a friend of mine and we were discussing some hedging strategies in the biotech space. The key issue kept being that if biotech stocks should be viewed as binary, it’s a perfect oppotunity to use options. Except that everyone knows this, so the options are usually expensive and pricing in the vol. So here’s a different idea…

I read somewhere that on average the biotech industry has been one of the largest wealth destroyers in history. While everyone points to the stock price performance of Genentech or Amgen, the statistics are overwhelmingly negative for firms that raise money but never make it past early stages of testing. Instead, why not short the entire industry as a strategy? Even if you account for significant upside in a few positions, calculate the implied vol on the options and put a stop at +50% or +100%, and you should still end up ahead. If you want a paired trade idea, use a short biotech with a long wealth creating industry position (consumer cyclicals?). Should be someone out there who can test this empirically. Use simple position size metrics (how about equal positions or vol weighted?) just to see if the underlying principle works, but logically, there is something there.

Last 5 posts by Yaron Sadan

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