Hey Trader,
If you attended Bill Griffo’s event last night …
You may recall us discussing the importance of watching the money flows in the market.
(Missed it? Catch the replay, and the trade, right here.)
Whether they’re from the Fed …
Or from Big Money trades (like the ones we watch).
Why do we follow Big Money Flows?
This $10,681,450 bet on an unusual biotech is the perfect example.
Compass Pathways (Ticker: CMPS)
Compass Pathways (Ticker: CMPS) isn’t your typical biotech …
The company focuses on mental health treatment, and they’re willing to think outside the box when it comes to new therapeutics …
For example, the company just released encouraging results from its study of using psilocybin to aid in treatment-resistant depression …
Yes, that’s psilocybin as in “magic mushrooms” – a controversial compound that has been gaining traction as a potential aid for those dealing with ongoing mental health issues.
On the charts, CMPS had been tearing higher over the last month, tacking on more than 60%, partially fuelled by news that the company had successfully patented one of its synthetic psilocybin compounds.
Chart courtesy StockCharts
However, on Monday, things started to go wrong …
The shares dropped 12% in a single trading session, ahead of its scheduled earnings announcement.
There wasn’t a clear catalyst besides pre-earnings selling, which made a very large bearish bet all the more notable …
With CMPS shares trading around $46 at the time this trade was placed, this trader purchased 16,433 contracts of the November 45-strike puts for $9.80.
That’s quite a strong statement, and the outright purchase of these puts would have required an outlay of $16,104,380. It also would have required CMPS to hit $35.20 before this trade became profitable.
However, this trader simultaneously sold 16,433 contracts of the November 30-strike puts for $3.30, reducing their cost to just $6.50, and moving their break even point up to $38.50.
It also helped reduce the outlay required to make this trade down to “only” $10,681,450 …
That’s still a trade I’m going to take note of – especially on a lesser-known stock like CMPS.
So we have a $10 million bet that CMPS is about to lose at least 16% of its value by November expiration, which was just 10 trading days away …
It is also noteworthy that at the time this trade was made, the implied volatility (IV) being priced into CMPS options was at an all-time high of 277%.
Frankly, that just goes to show that this trader really wasn’t here to mess around, and this was certainly a high-conviction trade.
So … what happened?
Two Wins = A Big Loss
Like I mentioned, CMPS was due to report earnings on Tuesday morning.
And the earnings call actually went quite well.
CMPS reported a lower year-over-year loss …
And reported a positive outcome of its Phase IIB psilocybin trials for treatment-resistant depression … albeit, there were some concerning side effects for some of the participants, but nothing that should have raised quite as much of a red flag as it seemed to …
Just one day after the shares suffered their pre-earnings 12% drop (Monday) …
They proceeded to tumble an additional 16%.
Chart courtesy StockCharts
Now, this is interesting …
Take a look at this intraday chart and note where the shares seem to have found a bit of a floor …
Chart courtesy StockCharts
They touched the 30-handle …
And bounced higher to close at $36.00.
How interesting …
Big Money sure seemed to have excellent timing, and a pretty good estimate of the extent of the “sell the news” drop-off.
And judging from the current open interest on these two contracts, I would say it’s not unlikely they already took quite a nice profit and ran …
THIS is why we watch Big Money Flow.
Your Only Option,
Mark Sebastian