Drug News Sets Up a Potential 61% Gain
One stock, recently on the daily list of biggest winners, had news that explained the large move. GlobeNewswire reported, “Ultragenyx Pharmaceutical Inc. (Nasdaq: RARE), a biopharmaceutical company focused on the development of novel products for rare and ultra-rare diseases, [recently] announced topline positive safety and efficacy data from Cohort 3 and longer-term data from Cohort 2 of the ongoing Phase 1/2 study of DTX301, an investigational adeno-associated virus (AAV) gene therapy for the treatment of ornithine transcarbamylase (OTC) deficiency.”
The stock jumped on the news.
The report continued, “In Cohort 3 (n=3), there were two confirmed female responders as well a third potential male responder who requires longer-term follow-up to confirm response status.
In Cohort 2, one female patient has newly demonstrated a response starting at Week 52 which was confirmed at Week 78. The two previously disclosed responders in Cohort 1 and Cohort 2 also remain clinically and metabolically stable at 104 and 78 weeks, respectively.
Across all nine patients dosed in the study, up to six patients have demonstrated a response.
“We are encouraged to see a more uniform response at the higher doses including three female responders. To date, three patients in the study have discontinued alternate pathway medication and liberalized their diets while remaining clinically and metabolically stable,” said Eric Crombez, M.D., Chief Medical Officer of the Ultragenyx Gene Therapy development unit.
“We are moving to prophylactic steroid use in the next cohort as we believe this could further enhance the level and consistency of expression that we have demonstrated so far.”
As of the data cutoff date, there have been no infusion-related adverse events and no treatment-related serious adverse events reported in the study. All adverse events have been Grade 1 or 2.
All three patients in Cohort 3 had mild, clinically asymptomatic elevations in ALT levels, similar to what has been observed in other programs using AAV-based gene therapy. All three patients have been responding to reactive tapering courses of steroids, and all patients remain clinically stable.
As previously disclosed, a fourth cohort will enroll three patients at the 1.0 × 10^13 GC/kg dose, using prophylactic steroids. Patients will receive an 8-week tapering regimen of prophylactic steroids, starting at least 5 days prior to dosing with DTX301 at a starting steroid dose of 60 mg/day.
The first patient is expected to be enrolled in the first half of 2020, and data from the prophylactic steroid cohort are expected in the second half of 2020.
Ultragenyx is continuing discussions with the U.S. Food and Drug Administration (FDA) regarding the potential Phase 3 study design.
Ammonia is expected to be a primary endpoint based on direct FDA feedback to date, with ureagenesis as a measure of biologic activity that supports the decision for patients to discontinue alternate pathway medications.”
The news comes after an extended decline in the stock price.
There could be a push to old highs in RARE.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up-trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for RARE
Every day, we scan the markets looking for trades that carry 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 RARE, a bull put spread could be opened with the February 21 put options. This trade can be opened by selling the February 21 $55 put option for about $4.20 and buying the February 21 $50 put option for about $2.30.
This trade in RARE would result in a credit of $1.90 or $190 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($55 – $50). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $310 ($500 – $190).
The potential gain in RARE is about 61% of the amount of capital risked. This trade will be open for a relatively short amount of time and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.