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Today I’d like to discuss one of my best trades for the year. As traders, these are the moments we live for. Nailing a trade like this is like throwing a touchdown. It feels so damn good! The stock was CASSAVA SCIENCES INC (SAVA).

It was a trade I’d been talking about in Master’s Club for weeks. I was stalking it for days, and then when everything lined up just right, I pulled the trigger. It was a classic relative strength play, but there was so much more to this trade idea.

The way the trade played out also tested my metal, forcing me to make some trading decisions along the way..

Cassava Sciences, Inc is a clinical-stage biotechnology company that develops drugs for neurodegenerative diseases. Its lead therapeutic product candidate is Simufilam, a small molecule drug; and they have an investigational diagnostic product candidate- SavaDx, a blood-based biomarker/diagnostic to detect Alzheimer’s disease.

This stock was 10 bagger this year, running from under $10 to over $140 this year due to results from its Alzheimer’s drug. However, many short sellers and so called experts in the biotech world claimed that the results were manipulated and the outcomes the company said they achieved could not be concluded from the data. This lead to a steady selloff to around $40 when it piqued my interest.

The Idea

The stock was already down almost 70% from the highs. I was interested in it because it had stopped going down and was starting to form a base. Given that SAVA had a short interest of over  23% as per Finviz the risk/reward was becoming very attractive. This was especially true given how explosive the stock had traded in the past. If this in fact, was a bottom, there was the possibility of huge upside.

My thought process was this: In my opinion, the news was not as terrible as the stock price showed. Although the company was accused of manipulating their results by short-sellers, any short-seller would say that.  

The company had come out and defended its results even though short sellers were skeptical of the conclusions reached. Short sellers did everything they could in the 40s to force people to sell stock! It was a long campaign of FUD which stands for Fear, Uncertainty, and Doubt.

Despite this, the stock would not break below $40 for over 2 weeks and was starting to curl a little.  However, the chart had not set up yet. I was stalking it day after day, waiting like a sniper for my signal, then it came.

The Trade Setup

It was Monday, September 20, and the market was down huge. The SPY had sold off over 4% in 2 days which is an unusually large move. However, during this massive selloff, SAVA was actually slightly green. Now when this happens during a market panic, I get interested. This is known as relative strength.

Why would a supposedly terrible stock be holding up during a market selloff? Perhaps somebody knew something? Whatever the reason, this stock should not have been as strong as it was, and that was my signal to enter! I bought 50 contracts of the $45 options expiring October 15, ’21, for $7. It didn’t take long to understand why this stock was so strong.

60 minute chart of SAVE with my entry

On September 22, just two days after my entry, SAVA announced further results that backed up their claims. The stock gapped up to around $60. That was a great read. However, what happened next I was not expecting. It was a sell-the-news event. Again short sellers were skeptical of the results, and SAVA traded down to $50. This was very disappointing, and now I had a decision to make.

Managing the Position

One of my rules is to never let a stock that I’ve been up big on turn red. But how much of my position would I sell? I still believed in the company and felt it was fairly valued, so although I was in a much better position at the open, I followed my rules and sold 20 contracts at $9.50.

 I was starting to second guess myself, wishing that I sold everything at the open, and that is a natural reaction. But I am a big boy and understood that it was shorts applying pressure. I managed my risk by taking off some size and stuck with the trade; it turned out to be the right play.

Over the next few days, SAVA rallied to $70, and I was able to sell 10 more contracts for $25.40. That was a great trade and a great read. The market tested my resolve, and looking back I made some great trading decisions.

I still have 20 contracts that I’m swinging for a possible move to $80 or $100. Right now, it is basically a freeroll to see what the stock does. Whatever happens next, this was one of my best trades of the year based on my analysis, the trade setup, and how I managed the position.

Bottom Line

Having a great trade idea is not enough. A big part of trading well involves waiting for the right setup to occur where you can make a trade with great risk-reward. It feels great when you nail the idea AND the timing. This is what happened in my call option trade in SAVA.

I had the idea and waited weeks for the trade to set up. Then when I saw the relative strength play, I pulled the trigger. I was tested by the market along the way but stuck to my trading rules. I was proud of how I executed, and it led to one of my trades of the year. This is why I love this game, and these are the moments I trade for!

Author:
Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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