The Money Tree

Safely Generating Income in Retirement

MYGN – What to Do?

Posted by mounddweller on June 20, 2010

It would be a big understatement to say that I slightly misjudged the inherent risk in my MYGN trade.  Clearly, MYGN was a mistake.  I over emphasized the positives of the trade and failed to turnover every rock looking for the hidden risk.  In this case the risk wasn’t exactly hidden, I just failed to perform adequate due diligence.  The validity of some of the company’s patents have been revoked (MYGN is appealing the decision). 

Initially it appeared after a sharp decline that the stock would stabilize and then begin a slow recovery.  I was fine with this because the company has an excellent balance sheet and there didn’t appear to be any need for immediate alarm.  However, in the past couple of weeks MYGN has continued to slip and has now fallen below support in the $17.50 range.

What to do?  As I see it I have the following choices:

(1) sell OTM naked puts for JUL or AUG in an effort to generate cash flow and significantly reduce my net cost basis if assigned.  I see my two primary options being the JUL $16 or AUG $15 puts.  The downside to this option is committing additional capital to a trade that might not yet have found a bottom.

(2) sell OTM near month calls below my current cost basis of $23.60.  This would allow me to generate cash flow off of my existing position but if the stock recovers I could find myself stuck in between a rock and a hard place trying to rollout my position to avoid assignment below my net cost basis.

(3) sell long-dated calls at or above my current net cost basis.  This option generates little income and has the potential to severely limit my potential gains should the stock rapidly recover in price well before my long-dated call options are due to expire.

(4) sell my existing MYGN shares at a loss and identify a new trade with which I can work to recover my loss of capital. 

(5) do a combination of the above.

(6) do nothing and wait for MYGN to recover.  It has a rock-solid balance sheet and good growth potential.  Eventually the price will recover.  However, given the current overall market condition that could be a long time coming.

I’m open to hearing your suggestions as to which of these options appeals to you and why.  Perhaps there is another alternative I haven’t considered.  If you think of one, please let me know.

Regards,

Troy

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3 Responses to “MYGN – What to Do?”

  1. dealmakr said

    Looked at your MYGN trade and here is some of what I see;

    Big gap down on earnings and forward guidance back in May with CEO comments economy having a drag on sales of primary product.

    Short interest continuing to rise now above 8.5mm shares

    Buyback of 100mm announced should be good for 6mm shares

    Cash on the books last report 511mm, buyback will reduce that

    August earnings will be scrutinized for downward sales trend continuation.

    Patent trials a big distraction

    No reasonable call premium available near your cost basis until Nov series

    These are just some of the bulletpoints on the negative side and I haven’t done any deep DD on the stock. If you want to hold the position I would look to sit tight until you can get some sort of better return in writing calls. Writing puts near the money for Jul & Aug risky if you feel overall bearish stance in the market, maybe a write of 1/2 position of Jul 15 puts to reduce cost basis if assigned, Aug puts may have earnings impact. If stock bounces back to 17.5 soon in July maybe a write of the 20 calls if you can get any sort of premium return, if assigned you reduce your current loss by 1/2 or can rollout to Aug.

    Having the same type of problem with CLDX and with stock bot avg near 6.50 with round expiring of Jun 5 puts and 7.5 calls reducing cost under 6 still in a loss position and will write the 5 calls if I can get near true cost basis to extricate the position.

    A tough trade when an earnings slam happens, be flexible and don’t get too attached to any position, if your DD supports holding on then go with your instincts, but watch what the market is saying.

    Best regards,

    dealmakr

  2. R Pell said

    There aren’t many appealing options (no pun intended!) in this situation. But if I was still comfortable with MYGN’s long-term outlook I’d probably be most inclined toward some variation of choice #1 (selling OTM naked puts).

    However, even still liking the stock long term I wouldn’t be crazy about the idea of just selling additional downside puts against it – especially short-term puts with relatively low premiums – and potentially ending up substantially increasing the size in a losing position.

    For example, selling three July 16-strike puts @ $0.55 would only lower the existing cost basis to around $23 if the puts expired OTM; but if assigned, the position size in terms of capital would increase significantly (by 65%) with a new average cost basis of about $19.50. I’m not sure how much flexibility would be left at this point in terms of being able to make further adjustments using options if the stock continued to trade near its current levels (~$16) or lower.

    I would probably take a somewhat longer-term approach and combine it with some risk management:

    – Sell 100 shares (30%) of the existing long stock position for a $700-$800 loss

    – Sell three January 16-strike puts @ about $1.90-$2.00

    If the puts expire OTM the losing position in MYGN has been reduced in size by 30% at minimal cost (mostly offset by the collected premium from the options sale).

    If the puts are assigned, the position size does increase over its original size, but by only about 35% with a new average cost basis of about $19, leaving more flexibility for further adjustments.

    I’ve used variations on this approach on several occasions and have been pleased with the results. But I’m approaching this more from an investing-oriented perspective, and appreciate that shorter-term traders would likely choose other approaches. That’s what’s so great about options – they offer so much flexibility.

  3. mounddweller said

    dealmakr and R Pell,

    Thanks a bunch for taking the time to think through my MYGN postion and offer up ideas on how I can extricate myself from this mess. This is my first pick in two years with using VISIONS where I am facing a potential loss. That’s a good track record for me and an even better testament to the benefits of sticking with a proven, conservative methodology like that which forms the basis for the VISIONS software.

    Again, greatly appreciate your ideas. They make sense to me.

    Regards,
    Troy

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