A Covid Trade With a Potential Gain of 63%
Trade summary: A bull call spread in Vir Biotechnology, Inc. (Nasdaq: VIR) using the November $45 call option which can be bought for about $4.25 and the November $47.50 call could be sold for about $3.30. This trade would cost $0.95 to open, or $95 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $0.95. The maximum gain is $155 per contract. That is a potential gain of about 63% based on the amount risked in the trade.
Now, let’s look at the details.
Benzinga covered the story that VIR was “rallying after the company provided an update on its partnered COVID-19 treatment program.”
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The chart also shows that the stock is basing and could be breaking through short-term resistance. A breakout could push the stock to resistance which is near $55, well above the recent price level.
The report continued, “Vir said it is advancing VIR-7831 — a fully human anti-SARS-CoV-2 monoclonal antibody it is developing along with GlaxoSmithKline plc— into a global Phase 3 trial dubbed COMET-ICE.
The development follows recommendation by an independent data monitoring committee on Sept. 30 that the study continue into Phase 3 on the basis of a positive evaluation of safety and tolerability data from the Phase 2 study.
The registrational study will now expand globally into additional sites in North America, South America and Europe, according to Vir and GlaxoSmithKline.
The Phase 3 portion will assess the safety and efficacy of a single intravenous infusion of VIR-7831 or placebo in approximately 1,300 non-hospitalized participants globally, the companies said.
The primary endpoint is the proportion of patients who have progression of COVID-19 as defined by the need for hospitalization or death within 29 days of randomization.
Vir and GlaxoSmithKline expect initial Phase 3 results as early as the end of 2020.
Results for the primary endpoint are due in the first quarter of 2021, with current projections for January.
The COMET program will also include two additional trials: one to evaluate VIR-7831 in hospitalized patients, and another for the prevention of symptomatic infection.
The companies also said they expect to start a Phase 1b/2a trial evaluating VIR-7832, a second investigational SARS-CoV-2 neutralizing antibody, in the second half of 2020.
VIR-7832, while sharing the same characteristics as VIR-7831, also has enhanced effector function, which may confer additional efficacy in treatment or prophylaxis by stimulating a T-cell response.”
The stock has a brief but volatile trading history. This volatility increases risk, but risks could be managed with a spread trade.
A Specific Trade for VIR
For VIR, the November options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A November $45 call option can be bought for about $4.25 and the November $47.50 call could be sold for about $3.30. This trade would cost $0.95 to open, or $95 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $95.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in VIR, the maximum gain is $155 ($47.50- $45= $2.50; 2.50- $0.95 = $1.55). This represents $155 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $95 to open this trade.
That is a potential gain of about 63% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying VIR could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.