Quant Analysis: $SRPT

I like biotech stocks because of their asymmetrical risk and volatility.

$SRPT – Biotech maker of, among other things, an experimental treatment for Duchenne Muscular Dystrophy (DMD). In short, a frameshift mutation on the X chromosome causes the disease, characterized by muscle degeneration and premature death in boys, usually before their 25th birthday.

SRPT’s treatment, Eteplirsen, triggers excision of exon 51 during pre-mRNA splicing of the dystrophin RNA transcript. Skipping exon 51 changes the downstream reading frame of dystrophin. For DMD patients with this particular frameshifting mutation, Eteplirsen can restore the reading frame of the dystrophin mRNA, which has been shown to activate life-saving production of functional dystrophin.

The company has its fair share of hair:

  • Very small data set (12 subjects)
  • Recent CEO issues
  • Alleged and later refuted, claims of data manipulation
  • Competition from BioMarine treatment via a similar mechanism

But it does have promise:

  • Orphan Drug Status
  • Overwhelmingly positive, statistically significant, clinical data
    • 72% of subjects saw significant production of functional dystrophin
  • BioMarine’s efficacy is questionable
  • FDA AdCom meeting 1/22/15

As we approach the January meeting date, I’ve opened some speculative $40 calls.

I’ve discussed the technicals HERE

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Again, I like biotech stocks because of their asymmetrical risk, and volatility, which $SRPT has had plenty of! Since entering its long term channel in June 2015, intraday volatility (high/low) has averaged 6.2%, each day.2I’m long the stock on a fundamental basis going into the January ADCOM meeting and I expect the stock to trend higher on optimism into the meeting date. As such, I want to maintain a net long exposure, but given the volatility, I’d also like to harvest gains from outsized moves. I performed a small quant analysis to try to optimize a trading strategy for trading calls from the long side. I focused on outsized daily moves and gaps and their following day follow throughs.

Daily (Close-Open) % Change

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Daily Follow-Through Gains

Here, I test the momentum hypothesis that outsized daily positive moves (high-low) should precede further next day positive gains. Essentially, if you’re long after a big move higher, don’t sell, continue to hold.

Days with greater than average positive daily moves (> 3.38%) saw a positive next day “follow-through” 61% of the time, with a median gain of 0.53%, but an average next day decline of 0.12%. Too weak to warrant a specific strategy.

Next Day High Follow-Through Gains

If large moves from open to close don’t precede “follow-on” gains, maybe moves that extend overnight do? “Next Day High” gains are measured from the prior day’s close to the current day’s high. Above average “Next Day High” gains (> 3.54%) saw new highs made during the next day 94% of the time, with a median follow-through gain of 2.22% and an average follow-through gain of 3.10%.

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This data suggests that if you’re long after a large overnight move, you definitely should not take profits until a new high, roughly 2.5% higher is set, the next day. Moreover, 60% of the time another, third, new high was set two days after the initial close. That said, this new high was only a median of 0.54% and an average of 0.68% higher than the prior high. This suggests that the first new high after an above average “Next Day High” marks a reliable price level to target an exit over the next trading day.

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