A Potential Deal Yields a Possible 133% Gain
Trade summary: A bull call spread in Iovance Biotherapeutics, Inc. (Nasdaq: IOVA) using the April 17 $40 call option which can be bought for about $5.50 and the April 17 $45 call could be sold for about $4. This trade would cost $1.50 to open, or $150 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 $150. The maximum gain is $350 per contract. That is a potential gain of about 133% based on the amount risked in the trade.
Now, let’s look at the details.
The news came from the company’s hometown newspaper, the San Francisco Business Times.
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“Cell therapy company Iovance Biotherapeutics Inc. has talked with potential buyers, Bloomberg reported Tuesday, sending the San Carlos company’s stock soaring 40% higher.
Among the possible buyers, one analyst told Bloomberg, are Foster City-based Gilead Sciences Inc. (NASDAQ: GILD) — where Iovance CEO Maria Fardis previously worked — and Japanese company Takeda Pharmaceutical Co. No decision has been made on whether Iovance will remain independent, Bloomberg reported.
Both Gilead and Takeda are oft-mentioned companies in buyout talks — Gilead has a $25 billion war chest and a growing cell therapy portfolio, and Takeda has partnered with several Bay Area drug developers.
Iovance, known until three years ago as Lion Biotechnologies Inc., made waves at last year’s American Society of Clinical Oncology meeting with its customized, cancer-fighting cell therapies. The 148-employee, nine-year-old company aims at harnessing cancer-killing white blood cells —called tumor-infiltrating lymphocytes, or TILs — with technology developed by Dr. Steven Rosenberg, the head of the National Cancer Institute’s tumor immunology section.
The company also is working on peripheral-blood lymphocytes, or PBLs, including one that received Food and Drug Administration clearance to start dosing patients with the blood cancer chronic lymphocytic leukemia.
Iovance’s more-advanced experimental TIL treatments — including lifileucel in a late-stage clinical trial — are aimed at cervical cancer, head and neck cancer, non-small cell lung cancer and melanoma.
TILs often are tied to better response rates for cancer drugs. The problem is, while TILs can wiggle inside a tumor and signal the immune system’s full fighting force, they also can get trapped there as the tumor cloaks itself from further detection.
Rosenberg’s method takes a patient’s tumor sample and fragments it, mining TILs as they emerge. Then over weeks, millions of TILs are grown in the lab, collected in a bag and sent to a cancer treatment center for a one-time infusion back into the patient.
The thinking is, once TILs have revved up the immune system, the body will purge itself of all tumors with a similar makeup.”
Prior to joining the company., IOVA’s CEO spent 10 years at Gilead, one of the potential buyers for IOVA.
The large gain in the stock shows up on the weekly chart, where the breakout is also easy to spot.
The chart also shows the stochastics indicator, a measure of momentum. Analysts generally expect momentum to move from high to low. Despite the large recent gain, the stochastic remains relatively low and indicates more potential upside in the price is possible.
The daily chart shows the risk since the recent rise in the stock pushed the price to the target attained from the extended trading range of the past few months.
A Specific Trade for IOVA
For IOVA, 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 $5.50 and the April 17 $45 call could be sold for about $4. This trade would cost $1.50 to open, or $150 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 $150.
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 IOVA the maximum gain is $3.50 ($45- $40= $5; $5 – $1.50 = $3.50). This represents $350 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $150 to open this trade.
That is a potential gain of about 133% 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 IOVA 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.