How to Trade Sarepta After the FDA Setback

NEW YORK (TheStreet) -- Many investors and traders avoid biotech and drug stocks altogether because they can be highly volatile and gut wrenching. Sarepta Therapeutics (SRPT) became the latest poster child of drug-sector volatility Tuesday when some bad news from the FDA sent shares plummeting more than 60%. The stock fell again Wednesday. All told, more than $800 million was erased from Sarepta's market value in two days. 

As an active trader, I see stocks gap lower (and higher) every day, albeit usually not as severe as Sarepta. When a stock declines more than 60% in a single day, my first instinct is to assume bankruptcy protection is next. But biotech and drug stocks can recover from such extreme volatility, and that's particularly true for Sarepta because the door is still open for FDA approval of its Duchenne muscular dystrophy drug eteplirsen. There's even a wild card which make get Sarepta's drug approved sooner than the market expects.

The Street's
Adam Feuerstein wrote an outstanding article laying out the Sarepta landscape. Feuerstein describes what went wrong, and more importantly, the anticipated amount of time before eteplirsen may reach another decision point with the FDA again. The long and short of it is Sarepta investors may have to wait another two or three years for an FDA approval decision on eteplirsen

With that said, there are a couple of favorable ways for traders to play Sarepta. Since large gaps lower generally have one or two days of follow-through, buy shares near or at the close on Thursday or early Friday (if near the lows.) After three down days, we typically see what's known as a "dead-cat bounce." Close out the trade with (hopefully) your gains.

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