Investing Tutorial: Binary Events

Binary Events
So I've mentioned that I am participating in the Grow Your Dough Throwdown in a few posts and I last shared how I was investing in a company called Mannkind (MNKD). Basically with this investment I am chasing unicorns, this could be one of the most volatile stocks I've ever purchased and the reason it's so volatile is because they have an upcoming binary event.

Now, a binary event in the business world means that there is a single event that will have one of two possible outcomes. Generally one is a very good outcome, and the other is quite the opposite. There really is no "middle of the road" result for this type of event. For example, a binary event could be FDA Approval on a new drug or a court case ruling on a patent infringement lawsuit. The results of both events dramatically change the outlook of the company in a major positive or negative way.

This was actually the exact reason why I chose to invest in Mannkind, because I knew that they were manufacturing a new drug that has an upcoming binary event. They have 2 upcoming events, but from what I have read the first event is more of just a checklist item where the FDA Advisory Committee will review their New Drug Application (NDA), this should be sort of a non-event that takes place on April 1st. The second event is the actual binary event which is scheduled for April 15th, this is when the Prescription Drug User Fee Act (PDUFA) will have to give their approval of the new drug. Depending on the result of this meeting, it will determine if the new drug will be expedited in the drug approval process, or will it be set back a few years. There is the possibility that the April 15th deadline is postponed, but another few months is not a setback in terms of the years it takes for drugs to get to the market. The decision that is made by the PDUFA is really the event that matters. Also this company doesn't seem to really have any other drugs that are anywhere near as far in the development lifecycle to come to term in case this one fails, so the news of this approval will really swing the company in one direction or the other.

Volatility, Friend or Foe? 


The reason that I choose this investment is because of the volatility that comes with a binary event. It's a quick way to possibly double your investment (or more) but at the same time the company value could come crashing down just as quickly. All of the trading that happens before the actual event is based purely on speculation, so it's hard to gauge the outcome of the event. You can try to do as much research as possible ahead of time but it's hard to say if the author of whatever you are reading actually has any better knowledge of the situation.

I don't recommend looking for companies with upcoming binary events as the risk involved in these investments is tremendous. I only have a small position in this company because of the investing experiment/competition that I happen to be involved in over this year and if I lose my total investment I may be bummed out, but I wouldn't do it if I couldn't afford to lose it. I have no idea how this will all play out in the end, but I will be sure to update you on the outcome of my experiment and what I end up doing after the binary event occurs. Until then I'm just keeping my fingers crossed and hoping for the best.

Related Posts:
The Grow Your Dough Throwdown - The Beginning
Part 2: The Grow Your Dough Throwdown - My Pick
The Grow Your Dough Throwdown - May Update

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