Auxilium Pharmaceuticals, Inc. (NASDAQ: AUXL) has gained over 13% since January 7th 2014. I normally approach stocks trading on their highs with caution. However, when dealing with a pharmaceutical it is wise to examine the fundamentals to determine if the move is justified. On January 8th 2014 AUXL released interim data from its Phase 4 retreatment study (AUX-CC-862) evaluating XIAFLEX® and clearly the market like it. This announcement coupled with the market’s reaction suggests investor’s belief in the drug and its potential to the company’s bottom line. It is also possible the move higher is driven by short covering. As a rule professional investors do not cover at the top unless they feel the company’s prospects have changed. The action in the option market today points to a large player rolling the Jan 22 calls out to the Mar 25 calls which is bullish. Given the option activity post announcement and the continued strength in the stock it is very possible AUXL will continue this move even if it’s at a slower pace. I view any retracement in AUXL as an opportunity to establish a long position. I further would use the 100 day moving VWAP (19.03 on 1/14/14) as my stop loss point, adjusting the stop each day. This level is far enough below the market to give the position a chance, yet not so far as to risk unnecessary capital.
Trade: Long the AUXL March 25 Calls for 1.35
Risk: $135 per 1 lot
Reward: Unlimited