The set-up: Sage Therapeutics Inc. (SAGE) develops medicines for central nervous system disorders. The company has an important Phase 3 data readout coming out by the end of September for one of their main drugs, SAGE-547 for SRSE, a severe form of epilepsy. I expect it to be a super-volatile event in which the downside risk is much more acute than the upside.

The stock already has run up from $46 in late January, and it’s been as high as $89.89 this month in anticipation of good news. If the data readout for SRSE comes out positive, that’ll push it toward $100, but if it comes out bad, the share price could fall by half, if not more. The risk-to-reward is off-kilter in this situation.

Warning signs: What has me a bit concerned is that they moved their trial results on SAGE-547 in SRSE from second quarter into third quarter. Generally, a delay is not a fantastic sign. None of the institutional holders I follow hold a large stake in this name, which shows a lack of conviction. It’s been a highly volatile name and, at this point, I don’t see any more payoff until that data event.

Why I’m not buying it now: The time to get into this stock was back in January or February. There was  good news about their major depression drug, SAGE-217, in the middle of February that caused the initial spike, and positive results in June for SAGE-547 in postpartum depression. That gives investors confidence going into the next data readout, but it’s not for the same drug, so we can’t assume the next readout will be as positive.

When I should have held it: I day-traded 5,000 shares of SAGE in July 2016, when it was just over $30 a share, and lost $1,100. Maybe that’s why I didn’t take a closer look at it earlier this year. In retrospect, July 2016 would have been a great time to go long.

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 Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  He currently has no shares, options or open orders in SAGE; he last owned the stock on July 6, 2016, when he played it as a day trade as described above.

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