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Managing the trade

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Bears in past profiled bearish trades for biotech equipment makers Affymetrix (NASDAQ:AFFX) $17.72 -14% and Invitrogen (NASDAQ:IVGN) $26.95 -8.3% are getting some nice downside action today after "fellow" biotech equipment maker Qiagen (NASDAQ:QGENF) $6.45 -35% reduced its outlook for FY02 and FY03.

The weakness in these three stocks are also helping contribute to the Biotech Index's (BTK.X) 294 -5.09 weakness and driving this index to new 52-week lows again today.

While I confess to having little "clue" as to what AFFX's or IVGN's business was, let alone know that QGENF even existed, the supply/demand charts for AFFX and IVGN had been giving some warnings that lower prices might be ahead. Lower prices are indeed being found in both AFFX and IVGN on "fears" that these two companies might guide lower like Qiagen did today.

This has on subscriber wondering how he might manage the trade going forward in shares of Affymetrix (AFFX) as he has patiently held some put options over the last couple of weeks, but finally gets the break he was looking for. To do this, I like to turn to the bar charts and use the retracement brackets to determine levels of future support and resistance. From there, the trader can then begin weighing the risk of current profits against further potential downside.

Affymetrix Chart - Daily Interval

It's so easy to buy a put or call option, but "knowing" when to lock in the gains once you get the move you were looking for is perhaps the most difficult part. My targeted range for the previously profiled AFFX July 20 puts (FIQSD) from $1.95, were for the stock to target the bearish vertical count of $14, while the spread-triple-bottom target from Professor Davis' study (profitable 86.5% of the time, average gain of 24.9%, in 4.6 months) gives the trader a $15.77 price target.

With retracement set above, I'd suggest a stop at $19.10 on the July expiration. After all, that really wasn't enough time based on Professor Davis' study of 4.5 months.

If holding the July options, then the holder of the July 20's does have what I call "time risk" on their hands. Again, a target of $15.77 based on Professor Davis' study is over a 4.6 month time frame and a put trader has seen the stock drop roughly 15% in just two weeks! Based on this, a trader is a little more than 1/2-way to one of there targets, and may be a good time to take 1/2 position off the table (for July expiration) at current levels, thus reducing risk in the trade.

I'd also like to try and drive home a point here in why I don't profile option trades with stop losses. For one, I don't OVERLEVERAGE in my option trades. However, I received numerous e-mails from traders after my bearish profile of where a "stop loss" order on the option would be placed as the stock did try and rally from $21 to $23. The only reason I can think of for having a stop loss order on the trade was that a trader OVERLEVERAGED and when the stock did rally back to resistance, become concerned that they had risked too much capital and needed to cut the trade and perhaps now has "missed out" on the eventual decline.

Over the last couple of weeks, we've talked about AFFX and shown the point/figure chart, which NEVER gave a "buy signal" after the higher probability sell signal at $21. Yes, there was a little heat that was taken, but supply eventually took control of the stock, with Qiagen's news providing the catalyst today.

One reason I'd look to lock in at least 1/2 position on the July expiration puts is that according to Dorsey/Wright and Associates, the biotech sector as a whole is "oversold" at 13.49% and risk is running high for bears in this group and it would be comforting to a bearish trader to lock in some gains while the "gettin's good!"

Jeff Bailey
Senior Market Technician
Option Investor

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