The Trading Floor: SMB Capital Podcast (Episode 2)

Key Concepts

• Biotech Day One Catalyst Breakout: A trading strategy focused on stocks in the biotechnology sector that experience a significant positive news event (catalyst) on their first day of trading, leading to a breakout from their opening range.
• Opening Range: The price range within which a stock trades during its initial period after the market opens.
• Gap Up: When a stock opens significantly higher than its previous day's closing price.
• Relative Volume (ARVOL): A measure of a stock's trading volume compared to its average daily volume, indicating its "in-play" status.
• Catalyst: A significant event that can influence a stock's price, such as positive clinical trial data for a drug.
• Gene Therapy: A medical approach that uses genes to treat or prevent disease.
• Huntington's Disease: A fatal neurodegenerative disease with no current cure.
• Valuation: The process of determining the current worth of an asset or company.
• Market Share: The portion of a market controlled by a particular company or product.
• Reading the Tape: The practice of analyzing real-time price and volume data to understand market sentiment and predict short-term price movements.
• VWAP (Volume Weighted Average Price): The average price of a security weighted by its trading volume.
• Risk-Reward Ratio: A comparison of the potential profit of a trade to its potential loss.
• TWAP (Time Weighted Average Price) Program: An algorithmic trading tool that executes trades over a specified period to achieve an average price.
• Offering Risk: The risk that a company will issue new shares, potentially diluting existing shareholders and lowering the stock price.
• Swing Trade: A trading strategy that aims to capture gains in a stock over a period of days, weeks, or months.

Summary of the Qur Trade: A Biotech Day One Catalyst Breakout

This episode of the Trading Desk podcast details a classic day trade executed on the stock ticker Qur, a biotechnology company. The trade exemplifies a "day one catalyst breakout" strategy, characterized by a significant news event, a substantial gap up, and a subsequent breakout from the opening range.

1. The Catalyst and Initial Setup

• Company and Product: Qur is a gene therapy company, notable for having the first approved gene therapy in the Western world for hemophilia B in 2022. Their key pipeline drug discussed is AMT-130, a gene therapy for Huntington's disease.
• Catalyst Details: On September 24th, Qur announced positive topline results for a study on AMT-130. The gene therapy demonstrated a 75% slowing of Huntington's disease progression. This is significant because Huntington's is a fatal disease with no cure, and prior treatments only alleviated symptoms without addressing the underlying degeneration.
• Pre-Market Action: Qur gapped up approximately 188% in the pre-market, opening around $40 after trading at $14 the previous day. This massive gap was accompanied by substantial pre-market volume (over 7 million shares), indicating high interest.
• Analyst/Expert Influence: Noteworthy was a pre-market tweet from Martin Shkreli, a biotech expert, suggesting Qur could go "5 to 10x from here." While acknowledging potential bias, the hosts recognized this tweet would put Qur on many traders' radars.

2. Valuation and Market Potential

• Methodology: The hosts used AI (like ChatGPT) and comparable company data to estimate Qur's potential market cap if AMT-130 were approved.
• Patient Pool and Pricing: An estimated 100,000 patients are eligible for the gene therapy. Comparable gene therapies and Qur's existing hemophilia B therapy (priced at $3.5 million) suggested a per-treatment range of $2 to $3 million for AMT-130.
• Revenue Scenarios:
  • 10% market share: $25 billion in revenue (10,000 patients x $2.5 million average cost).
  • 20% market share: $50 billion in revenue.
  • 30% market share: $75 billion in revenue.
• Market Cap Estimation: Based on comparable biotechs trading at 2-4x their peak sales, the estimated market cap ranged significantly higher than Qur's post-gap market cap of $3-4 billion. This suggested the stock was potentially undervalued, with "meat on the bone."
• Trader's Perspective: While not aiming to be analysts, this valuation work provided conviction that the stock had significant upside potential, making it a top watch list candidate for potential long setups.

3. The Trading Process and "Classic SMB Trade" Elements

• Pre-Market Observation: Qur was observed trading in a range of approximately 10 points after the massive gap up, holding its gains.
• Volume Scanner: The stock was initially identified through a "percent of ARVOL" pre-market scanner. Qur's 7 million pre-market shares represented over 500% of its average daily volume (1.3 million shares), an exceptionally high figure. This indicated high liquidity and potential for orderly price action.
• Analogous Trade (ABVX): A similar biotech catalyst breakout in ABVX in July was used as an analog. ABVX also gapped up significantly, trended on day one, and continued to trend for weeks. This analog suggested that Qur could also hold its gains and trend.
• Trader's Mindset (Garrett): Garrett was initially in "reset mode" after a period of inconsistency and was not planning to trade. However, the team's collective interest and the stock's compelling setup drew him in. He emphasized the importance of letting trades "come to you" and not forcing them, especially when feeling "dinged up."
• Key Elements of a Classic SMB Trade:
  • Huge Catalyst Day One: As described with Qur.
  • High ARVOL: Stock is "in play" with significant volume.
  • Big Gap: Substantial price increase from the previous day.
  • Holding Higher for a Long Period: The stock proves its strength by not selling off after the initial gap.
  • Battle on the Tape: Buyers and sellers engage, leading to price tightening.
  • Buyers Win: A directional move occurs after the consolidation, indicating a breakout.
• The "Battle" and Failed Breakdown: After the market open, Qur initially traded down, dipped below VWAP, but immediately reclaimed it. This "failed breakdown" was an early sign that sellers were struggling and the stock was holding well.
• Initial Position Sizing: Small "feeler" positions were taken to gauge the stock's behavior and improve average entry price, rather than committing to a full position immediately.
• The Higher Low and Tightening Range: Around 11:30 AM, after breaking a trendline and reclaiming VWAP, the stock formed a higher low and began to tighten up. This indicated buyers were gaining control and setting up for a potential breakout.
• The Breakout Entry: The actual breakout occurred when Qur broke through its pre-market and intraday highs. This was considered the point of maximum information and a strong entry point due to the tight consolidation.
• Execution and Risk Control:
  • Adding Size: Tim added to his position as the stock held its new highs and tightened up, utilizing a TWAP program to scale in gradually.
  • Target: The initial target was $50.
  • Risk Management: The ability to control risk was paramount. Buying the breakout allowed for a stop-loss just a dollar or two below the entry, with the potential for a 10-point gain.
• Trade Outcome: The intraday trade reached the $50 target, with some traders taking profits and others trailing their stops. The hosts acknowledged they could have been larger in the trade, highlighting the importance of context and conviction.

4. Swing Trade Considerations and Nuances

• Overnight Risk: While the intraday trade was successful, the possibility of swinging the stock overnight was discussed.
• Offering Risk: A key deterrent for swinging was the "offering risk," the potential for the company to issue new shares. This was particularly relevant as Qur had an offering shortly after the close, similar to the ABVX analog.
• Shane's Swing Trade: Shane, a team member, successfully swung the trade overnight. The stock continued to trend upwards for several days, demonstrating the potential for larger gains with a longer-term view.
• Learning from Experience: The hosts reflected on their decision not to swing, noting that despite the offering, the stock ultimately moved higher. This highlights the nuance in assessing overnight risk and the value of holding a small "piece" of a breakout trade to participate in potential further upside.

5. Conclusion and Future Improvements

The Qur trade is presented as a "classic SMB capital trade" and a prime example of a day one catalyst breakout. The key takeaways emphasize:

• The Power of Catalysts: Understanding and valuing significant news events is crucial for identifying high-conviction trades.
• Context is King: Deeper analysis of catalysts and their potential impact on future revenue can provide a significant edge.
• Risk Management: Identifying high risk-reward setups allows traders to control their risk effectively and make larger bets when conviction is high.
• Continuous Improvement: The team is focused on improving their ability to grade catalysts more precisely and leverage intraday opportunities with greater size.

The hosts conclude by reiterating the importance of these types of trades and their commitment to refining their approach to capitalize on them more effectively.