A Possible Gain of 132% on Risk of About $215
Traders seemed to cheer a company’s strategic plan. News of planning can sometimes lead to large moves in a stock because it shows management is seeking to address concerns that may have led to lackluster performance in a stock.
While there are examples of strategic plans that scare investors, recent news shows how bulls can appear on the news
GlobeNewswire recently reported,
“Forty Seven, Inc. (Nasdaq: FTSV), a clinical-stage, immuno-oncology company focused on developing therapies to activate macrophages in the fight against cancer, outlined its strategic plan and expected milestones for 2020.”
Forty Seven, Inc. is clinical-stage immuno-oncology company. The company is focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer.
The company’s lead product candidate, 5F9, is a humanized IgG4 subclass monoclonal antibody against CD47 that is designed to interfere with recognition of CD47 by the SIRPa receptor on macrophages.
The company is investigating 5F9 in multiple Phase I and Phase II trials in various cancers including acute myeloid leukemia (AML), non-Hodgkin’s lymphoma (NHL) and colorectal carcinoma (CRC), and ovarian cancer, as both a monotherapy and in combination with other therapies, such as rituximab and cetuximab.
The news release continued,
“Our vision is to deliver groundbreaking therapies to patients by harnessing the potential of the innate immune system in the fight against disease,” said Mark McCamish, M.D., Ph.D., President and Chief Executive Officer of Forty Seven.
“As we enter the new year, we are executing against this strategy with full force. Our potential-registration enabling programs for magrolimab in MDS and DLBCL are underway, and we are pleased to have recently received FDA Orphan Drug designation for magrolimab in MDS.
In parallel, we are preparing to advance FSI-174 and FSI-189 into the clinic, where we believe we can leverage our deep understanding of the CD47/SIRPα pathway to engage previously unexploited phagocytic pathways.”
Dr. McCamish continued, “Following our successful follow-on offering in December 2019, we are well financed, with sufficient resources to advance our pipeline through key milestones, including the potential submission of our first biologics license application for magrolimab, while scaling our CMC activities to support future product launches.
We expect 2020 to be a year of notable progress across our portfolio, as we read out data for each of our magrolimab programs and accelerate ongoing efforts to offer magrolimab to genomically-defined patient populations, like TP53-mutant AML, where we believe our approach can offer targeted benefit.
We will simultaneously progress our earlier-stage assets, FSI-174 and FSI-189, in hopes of delivering on the full potential of macrophage biology for people living with cancer and other serious diseases.”
The longer term chart shows the performance has been impressive in the past few weeks, about six months after the company’s IPO.
A Trade for Short Term Bulls
As with the ownership of any stock, buying FTSV 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 usually 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 has 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.
A Specific Trade for FTSV
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For FTSV, the April 17 options allow a trader to gain exposure to the stock.
An April 17 $50 call option can be bought for about $5.70 and the April 17 $55 call could be sold for about $3.55. This trade would cost $2.15 to open, or $215 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 $215.
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 FTSV the maximum gain is $2.85 ($55 – $50 = $5; $5 – $2.15 = $2.85). This represents $285 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $215 to open this trade.
That is a potential gain of about 132% in FTSV based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.