Last night, Celgene Corporation (NASDAQ:CELG) released a headline that they canceled phase three for their potential solution to Crohn’s disease. The stock is now trading down 10%. This means that it would now be down 16% since early October.
While this sounds like a disaster for recent bulls on the stock, luckily CELG came into this headline up 35% in 12 months. So even after this dip, the stock is still up over 20%. This would put it in line with the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB)
So those who have been long the stock for a while are still set. For the rest, it too early to catch this falling knife?
No, but I have to use options. There is no telling what the stock will do in the short term. Corrections this big usually are not one-day events. But in options, I can structure trades where I can leave room for more downside. This reduces the need to be surgical with my timing.
However this doesn’t mean that I can blindly take trades.
CELG is expensive from a price-to-earnings ratio. Its P/E of 38 is well above that of AbbVie Inc (NYSE:ABBV) or Bristol-Myers Squibb Co (NYSE:BMY), which are both near 23. Price to book value is a whopping 16. Compare that to, say, Apple Inc. (NASDAQ:AAPL) which has a P/E less than half of CELG and a price to book of 6.5.
Click to Enlarge Technically and even before this dip, CELG stock was precariously perched and in danger of losing an ascending trend line. This headline caused its breach and will likely fill almost all of its measured move lower. The area around $125 per share has been in contention since January of 2015. So it is likely to present some support.
Should this CELG level also fail, then I look 15% lower for another similar zone of contention.