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Actionable news in RLYP: RELYPSA Inc,

Relypsa: Protecting Your Gains


With Relypsa shares spiking nearly 67% on Thursday on another buyout rumor, before giving some gains back Friday, we look at ways longs can lock in gains.

As with the case of Valeant recently, Relypsa is extremely expensive to hedge with puts, but can be cost-effectively hedged with a collar.

We present examples of both hedges, including a zero-cost optimal collar that allows another 23% in potential upside while limiting downside risk to a drawdown of no more than 22%.

Locking In Relypsa Gains

Veltassa banner image from the Veltassa website

Shares of Relypsa (NASDAQ:RLYP), maker of the hyperkalemia treatment Veltassa (pictured above), spiked 67% Thursday on another buyout rumor, before sliding back about 7.5% on Friday. Relypsa investors who entered their positions near the stock's March low are now up over 81%. For those and other Relypsa longs who are in the black now and interested in laying off some risk, you can, of course, unload some shares. But if you'd like to hold on to all of your shares in the hopes of adding some gains, we'll look at ways of hedging it below.

When it comes to hedging, Relypsa is similar to another pharmaceutical stock we looked at recently, Valeant Pharmaceuticals (NYSE:VRX). Like Valeant, Relypsa is prohibitively expensive to hedge with optimal puts over the next several months, but can be inexpensively hedged with an optimal collar. So we'll show an optimal put hedge for illustration purposes, but the optimal collar will be of more practical interest to RLYP longs. If you'd like a refresher on those and other hedging terms first, please see the section titled "Refresher On Hedging Terms" in this previous article of ours, Locking In Gold Gains.

Hedging RLYP With Optimal Puts

We're going to use Portfolio Armor's iOS app to find optimal puts and an...