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A Possible Gain of More Than 400% for Less Than $100 in Risk

A Possible Gain of More Than 400% for Less Than $100 in Risk

Trade summary: A bull call spread in Invitae Corporation (NYSE: NVTA) using the July $30 call option which can be bought for about $1.50 and the July $35 call could be sold for about $0.68. This trade would cost $0.82 to open, or $82 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $0.82. The maximum gain is $418 per contract. That is a potential gain of about 409% based on the amount risked in the trade.

    Now, let’s look at the details.

    According to PR Newswire.

    NVTA, a leading genetics company, and ArcherDX, a leading genomics analysis company democratizing precision oncology, [recently] announced a definitive agreement under which Invitae will combine with ArcherDX to create a genetics leader with unrivaled breadth and scale in cancer genetics and precision oncology.

    The combined company will be poised to transform care for cancer patients, accelerating adoption of genetics through the most comprehensive suite of products and services available.

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  • Integrating germline testing, tumor profiling and liquid biopsy technologies and services in a single platform will enable precision approaches from diagnostic testing to therapy optimization and monitoring, expanding access to best-in-class personalized oncology.

    “From the beginning, Invitae’s goal has been to aggregate the world’s genetic tests into a single platform in service of our mission to bring comprehensive genetic information into mainstream medicine. Today, we take another major step forward in that effort,” said Sean George, Ph.D., co-founder and chief executive officer of Invitae.

    “ArcherDX and Invitae share a foundational belief in the power of genomic information to impact care. We are thrilled to unite with Invitae to form the leading hub for precision oncology, diagnostics, therapy optimization and monitoring, with an opportunity to accelerate both patient care and shareholder value,” said Jason Myers, Ph.D., chief executive officer and co-founder of ArcherDX.

    NVTA is near the upper edge of resistance on the daily chart shown below.

    NVTA daily chart

    The longer-term chart shows a possible triple top followed by a decline to the expected price target and now a possible rally to the old highs.

    NVTA weekly chartCombined, the two companies offer products, workflow and powerful bioinformatics solutions to provide an opportunity to advance precision oncology into regional and community settings and address an estimated $45 billion market opportunity.

    This is possible, the companies believe because broad adoption of precision oncology has been limited, particularly in regional and community settings where approximately 85 percent of patients receive care.

    Without precision oncology, late-stage cancer patients can suffer from poor prognosis and outcomes, while early-stage patients may receive an inaccurate prognosis that results in unnecessary treatment and delayed detection of recurrence.

    Uniting Invitae and ArcherDX will offer comprehensive support for precision oncology.

     A Specific Trade for NVTA

     For NVTA, the July 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 July $30 call option can be bought for about $1.50 and the July $35 call could be sold for about $0.68. This trade would cost $0.82 to open, or $82 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 $82.

    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 NVTA, the maximum gain is $418 ($35- $30= $5; 5- $0.82 = $4.18). This represents $418 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $82 to open this trade.

    That is a potential gain of about 409% 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 NVTA 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  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.

    bull call spread

    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.

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