A Possible Triple Digit Coronavirus Trade
Trade summary: A bull call spread in Vir Biotechnology, Inc. (Nasdaq: VIR) using the April 17 $40 call option which can be bought for about $8.88 and the April 17 $45 call could be sold for about $7.41. This trade would cost $1.47 to open, or $147 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 $147. The maximum gain is $353 per contract. That is a potential gain of about 140% based on the amount risked in the trade.
Now, let’s look at the details from GlobeNewswire
“Vir Biotechnology [recently] today announced that it has signed a letter of intent with Biogen Inc. (BIIB) for the development and clinical manufacturing of human monoclonal antibodies for the potential treatment of COVID-19, the disease caused by the SARS-CoV-2 virus.
Because of the urgency of the situation, the companies have begun work while a Clinical Development and Manufacturing Agreement is being negotiated.
Subject to the completion of a definitive agreement, Biogen would continue cell line development, process development, and clinical manufacturing activities in order to advance the development of Vir’s proprietary antibodies.
“These exceptional circumstances presented by the threat of COVID-19 require that we work with great urgency in the interest of the public good,” said George Scangos, Ph.D., CEO, Vir.
“Biogen is one of the global leaders in cell line and process development for advanced biologics; tapping into their capabilities will provide us with a U.S. base for supply and manufacture of antibody therapies.”
Vir has identified a number of monoclonal antibodies that bind to SARS-CoV-2, which were isolated from individuals who had survived a SARS (Severe Acute Respiratory Syndrome) infection.
The company is conducting research to determine if its antibodies, or additional antibodies that it may be able to identify, can be effective as treatment and/or prophylaxis against SARS-CoV-2.”
Vir has a robust method for capitalizing on unusually successful immune responses naturally occurring in people who are protected from, or have recovered from, infectious diseases.
The platform is used to identify rare antibodies from survivors that have the potential to treat and prevent rapidly evolving and/or previously untreatable pathogens via direct pathogen neutralization and immune system stimulation.
Vir engineers the fully human antibodies that it discovers to enhance their therapeutic potential. This platform has been used to identify and develop antibodies for pathogens including Ebola (mAb114, currently in use in the Democratic Republic of Congo), hepatitis B virus, influenza A, malaria, and others.
The stock as only been trading for a few months and the recent activity has been bullish as traders anticipated the company’s involvement in the battle against coronavirus.
A Specific Trade for VIR
For VIR, the April 17 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.
An April 17 $40 call option can be bought for about $8.88 and the April 17 $45 call could be sold for about $7.41. This trade would cost $1.47 to open, or $147 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 $147.
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 $3.53 ($45- $40= $5; $5 – $1.47 = $3.53). This represents $353 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $147 to open this trade.
That is a potential gain of about 140% 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 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.