Bio-tech Stocks Are Oversold, But They Haven’t Bottomed Yet

I like to do research to find smaller biotech companies that have very interesting drug pipelines. I will speculate with a few bucks in either direction with fairly long range calls and puts, because it's quite likely that these volatile companies will move sharply in either direction when drug trials and FDA decisions are either positive or negative. A $5 biotech stock will fall perhaps $2-3 on bad news, and will likely shoot up into double digits briefly on good news. I've seen biotechs in the $4-6 dollar range shoot up into the twenties on occasion on good news.

But the news is usually released before or after market hours, so that the stock gaps higher or lower on the open if you weren't already long or short - or didn't already have the "right" to be long or short by owning put / call options on it. If the news is good and the stock goes higher, calls are exercised and puts are not. And the reverse is done if the news is bad and the stock tanks. The only risks are the small premiums paid for the options not exercised, and the slight possibility that the stock may not move either way before the options may expire.

Because these stocks are usually low priced in most cases before the news hits, I typically buy more calls than puts. The downside is limited to 100% in the worst case scenario, but the upside is potentially unlimited - I've seen 300-600% increases literally in a day or 2 on a few names.