Big Money Bet On Hallucinogens

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


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