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Developing a Coronavirus Vaccine Could Lead to a 175% Gain

Developing a Coronavirus Vaccine Could Lead to a 175% Gain

Trade summary: A bull call spread in Moderna, Inc. (Nasdaq: MRNA) using the May 15 $47 call option which can be bought for about $5.50 and the May 15 $50 call could be sold for about $4.70. This trade would cost $0.80 to open, or $80 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 $0.80. The maximum gain is $220 per contract. That is a potential gain of about 175% based on the amount risked in the trade.

    Now, let’s look at the details.

    According to Bloomberg,

    “Moderna Inc. shares rose as much as 21% after the company said the U.S. government has agreed to pay as much as $483 million for the company to develop and test its Covid-19 vaccine now in an initial clinical trial.”

    MRNA daily chart

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  • The stock has been in an uptrend as the company has reported steady progress towards a vaccine.

    The latest gain comes as the Biomedical Advanced Research and Development Authority, a division within the Department of Health and Human Services, announced funding for development of the vaccine mRNA-1273.

    Traders seem to be excited that Moderna’s Covid-19 vaccine is one of the first in the world to begin human trials. According to recent reports, there are 70 vaccines in some stage of development and this development places MRNA in position to be the first to production.

    In a statement, MRNA said, “The vaccine uses a novel RNA technology to stimulate the immune system. A small human safety study has been underway since March. The first 45 patients have enrolled, and the trial was recently expanded to add additional groups of older patients.

    “This grant allows us to go as fast as we can,” said Stéphane Bancel, Moderna’s chief executive officer, in an interview. Instead of waiting for results of its safety trial before proceeding with manufacturing scale-up, the company can spend money now to begin making vaccine doses for large-scale trials.

    The stock is now extended after rising more than 120% above its first trade in December 2018.

    MRNA weekly chart

    Being so overbought, traders should focus on risks and consider spread trades to manage the risks in this trade.

    A Specific Trade for MRNA

    For MRNA, the May 15 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 May 15 $47 call option can be bought for about $5.50 and the May 15 $50 call could be sold for about $4.70. This trade would cost $0.80 to open, or $80 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 $0.80.

    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 MRNA the maximum gain is $2.20 ($50- $47= $3; 3- $0.80 = $2.20). This represents $220 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $80 to open this trade.

    That is a potential gain of about 175% 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 MRNA 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 MRNA 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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