Although I’ve had the great pleasure of discussing options trading on the TipRanks platform, talking about derivatives is one thing. However, trading derivatives is quite another. Recently, I exited a profitable trade in biotechnology firm Biomea Fusion (NASDAQ:BMEA). While it was an exhilarating several days of waiting for my thesis to pan out, I was more relieved than ecstatic about my high-risk venture. I’m still bullish on BMEA stock, but I’m happy to do so without the pressure as I share with you what I learned.
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BMEA Stock Taught Me to Respect the Basics
Right off the bat, I made two mistakes that I’m ashamed to admit and could have cost me dearly. Number one, I jumped into BMEA stock options without even knowing what the company does other than something related to biotech. I now know – but only through hindsight – that the company creates novel covalent small molecules to treat serious and life-threatening diseases.
Number two, I rushed into the trade with two minutes remaining before the closing bell. That rash move definitely cost me because the next day, BMEA stock tanked in the open market. And that led to a ridiculous loss in the options market. At the time, I wasn’t that concerned because I purchased BMEA Apr 19 ’24 20.00 Call options. I had time on my side, but it was a rude awakening.
Further, the rushing into the trade caused me to make another mistake: I bought the BMEA stock option at the “ask” price. Depending on the magnitude of interest in a particular derivatives market, that’s not a problem. However, in a limited volume market with wide bid-ask spreads, your target security could rise above the call’s strike only to be barely profitable.
So, here’s my first tip. If you’re going to trade low-volume options, buy at the price you’re comfortable with. If the market agrees, you’re golden. However, if you are rejected, it might end up working in your favor.
Biomea Had Odds Stacked in the Contrarian’s Favor
At this point, you might be wondering why I was so confident in buying BMEA call options without even knowing anything about the company. It was an even bolder move than I let on earlier. You see, I bought the $20 call on January 10, when BMEA closed at $16.84. A day later, it closed down to $15.30, and the pain didn’t stop until January 19, when shares fell to $13.92.
Three factors ultimately contributed to my decision to pull the trigger. First off, BMEA stock carries a massively high short interest of 53.08% of its float. Also, its short-interest ratio clocked in at 11.44 days to cover. If Biomea did anything noteworthy, BMEA could easily skyrocket, panicking out the bears. And that would create a positive feedback loop, driving up shares even more.
Second, options flow data recorded 500 contracts sold of the Jul 19 ’24 15.00 Call. Further, the premium received by the call writer came in at $141,950. That’s a strong-conviction bearish trade that could get blown up if a short squeeze materializes in the open market. And naturally, that risks forcing a gamma squeeze in the options market.
Third, analysts love BMEA stock, featuring a unanimous strong buy rating. Two of these were either reiterated or assigned on January 10. And three bullish ratings materialized in December. With the market comprehensively bearish but the experts comprehensively bullish, I saw a deep-value opportunity.
That’s a key trick when attempting to find out which options ideas have high potential. Even though I was foolish in my rashness for BMEA stock, filtering for market ideas that printed this “contradiction” between bearish trading sentiment and bullish expert analyses effectively saved me.
When It’s Time, It’s Time
For me, judgment day arrived on February 1. In the morning hours (late morning for those on the east coast), I noticed that BMEA stock was moving higher. I watched with glee as it marched to $18.60, then $19.57. And for a brief few moments, it reached, then exceeded the $20 strike price. Not only was I at the money, I was in the money.
Still, that was when I received a harsh lesson. First, as stated earlier, I did not do myself any favors by buying at a high asking price. Second, the low trading volume associated with BMEA stock options hurt me. Again, the bid-ask spread was incredibly wide. And if I had sold at the bid price, I would do a tad bit better than break even.
Looking back, the fact that the BMEA stock options chain featured strike price gaps of $2.50 was a major clue that I should have been more sober regarding my decision to buy the contract in the first place. As I discovered, big strike price increments of $2.50 for a then-$20 stock almost always mean that trading volume is relatively low.
Finally, I noticed that BMEA stock was struggling in the open market to stay at $20. Sensing huge resistance, I decided to pull out. However, the market was offering a bid of $4.10 while the ask stood at $4.50.
This time, I learned my lesson. I sold to close my option, setting a limit price of $4.30. Someone grabbed it immediately. A day later, BMEA stock fell notably.
Is Biomea Fusion Stock a Buy, According to Analysts?
Turning to Wall Street, BMEA stock has a Strong Buy consensus rating based on six Buys, no Holds, and zero Sell ratings. The average BMEA stock price target is $58.50, implying 213.3% upside potential.
The Takeaway: BMEA Stock Options Gave Me a Heart-Pounding Lesson
There’s no teacher like Wall Street, and usually, it relentlessly abuses mistakes. However, even though I had made some critical ones – which I won’t be repeating anytime soon – I also discovered a valuable lesson: filtering for ideas that stack the odds in your favor can enhance your chances.
That’s where TipRanks can be incredibly helpful with its aggregation of analyst ratings along with its stock-screening tools. And to be sure, BMEA stock still has the wind at its back. However, I think I’ll speculate in the open market this time.
