Complex News Can Lead to a Simple Trade
Traders aren’t always experts in the companies they buy and sell. A recent news story illustrates how traders can use a stock chart to help understand news that can be difficult for the average investor who is not an expert in the company’s field to understand.
Business Wire reported a story with a headline that could require some time to understand:
“Filing Supported by Data Demonstrating Non-inferiority Compared to Truvada® Coupled with Bone and Renal Safety Advantages in People at Risk of Sexually Acquired HIV Infection”
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“Gilead Sciences, Inc. (Nasdaq: GILD) announced that the company has submitted a supplemental New Drug Application (sNDA) to the U.S. Food and Drug Administration (FDA) for Descovy (emtricitabine 200 mg and tenofovir alafenamide 25 mg tablets) for pre-exposure prophylaxis (PrEP) to reduce the risk of sexually acquired HIV-1 infection among individuals who are HIV-negative and at risk for HIV.
A Priority Review voucher was submitted with the filing, leading to an anticipated review time of six months.
The filing is based on the results of the Phase 3 DISCOVER trial which evaluated the safety and efficacy of Descovy compared to Truvada in men and transgender women who have sex with men at high-risk for sexually acquired HIV infection.
Truvada (emtricitabine 200 mg and tenofovir disoproxil fumarate 300 mg tablets) for PrEP is currently the only FDA approved product indicated to reduce the risk of sexually acquired HIV-1 in individuals (≥35 kg) who are HIV-negative and at risk for HIV.
Results from the DISCOVER trial, presented at the 2019 Conference on Retroviruses and Opportunistic Infections, demonstrated that Descovy achieved non-inferiority to Truvada in study participants who were at substantial and sustained risk of HIV acquisition.
Additionally, statistically significant improvements in renal and bone laboratory parameters were observed for participants receiving Descovy versus those receiving Truvada.
“Data have shown that when used in combination with other agents for HIV treatment, Descovy offers high efficacy and additional benefits with respect to renal and bone safety compared with Truvada.
Now, the results from the DISCOVER trial suggest that Descovy may offer those same benefits for HIV prevention, which are important considerations for the potential long-term use of PrEP,” said John McHutchison, AO, MD, Chief Scientific Officer and Head of Research and Development.
In the United States, Descovy is approved in combination with other antiretroviral agents for the treatment of HIV infection in patients weighing ≥25 kg and is not indicated for PrEP. Truvada is indicated in combination with safer sex practices for HIV PrEP to reduce the risk of sexually acquired HIV in at-risk individuals who are HIV-negative and weigh ≥35 kg.
Descovy and Truvada each have a Boxed Warning in their respective product labels regarding the risk of post-treatment acute exacerbation of hepatitis B; the Truvada label also carries a Boxed Warning for the risk of drug resistance with PrEP in undiagnosed early HIV infection.
“Studies, including DISCOVER, have shown that adherence to a once-daily PrEP regimen can decrease the risk of HIV acquisition,” said Edwin DeJesus, MD, FACP, FIDSA, Medical Director, Orlando Immunology Center.
“If approved, Descovy may help equip health care providers with an additional preventive option thereby potentially expanding the impact of PrEP.”
Among DISCOVER trial participants, Descovy and Truvada were well tolerated and had low discontinuation rates due to adverse events of 1.3 percent and 1.8 percent, respectively. The most common (≥5 percent in the Descovy group) drug-related adverse event was diarrhea.
The stock moved higher and the news could have contributed to that move.
The news comes as GILD is in an extended basing pattern and the news could indicate a turnaround is near.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GILD 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 GILD
Every day, we scan the markets looking for trades that GILD 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 GILD, the May 17 options allow a trader to gain exposure to the stock.
A May 17 $70 call option can be bought for about $1.35 and the May 17 $72.50 call could be sold for about $0.63. This trade would cost $0.72 to open, or $72 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 $72.
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 GILD the maximum gain is $1.78 ($72.50 – $70 = $2.50; $2.50 – $0.72 = $1.78). This represents $178 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $72 to open this trade.
That is a potential gain of about 147% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.