Drug Trials Set Up a Trading Opportunity
The drug testing process takes years and creates multiple opportunities for traders to benefit from news. One example, as PR Newswire recently reported is in shares of Biohaven Pharmaceutical Holding Company Ltd. (NYSE: BHVN).
The company recently announced continued progress in its glutamate modulating platform with enrollment expected to complete in three Phase 2/3 clinical trials of troriluzole in Alzheimer’s disease, generalized anxiety disorder and obsessive-compulsive disorder by the end of 2019.
Enrollment in the spinocerebellar ataxia Phase 3 clinical trial is expected to complete by the first quarter of 2020. In addition, the first Phase 3 trial from the company’s myeloperoxidase (MPO) inhibition platform is set to begin by the third quarter of 2019.
The study of verdiperstat will examine efficacy and safety of the drug in multiple system atrophy (MSA).
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“We continue to advance our late stage assets targeting some of the most disabling neurodegenerative and neuropsychiatric disorders with our novel drug candidates. Our neuroinnovation platforms are evaluating the next generation of treatments for diseases in which there are currently limited or no treatments available,” said Vlad Coric, M.D., Chief Executive Officer of Biohaven.
“We are looking to efficiently advance these candidates through the clinic and work with regulatory agencies to provide new treatment options for patients with devastating neurological conditions.”
Troriluzole, a product candidate in Biohaven’s glutamate modulation platform, which modulates the brain chemical glutamate, is currently being studied in four ongoing clinical trials that are expected to complete enrollment this year:
- The Phase 2/3 clinical trial of troriluzole in Alzheimer’s disease, which has already enrolled over 100 patients.
- A Phase 3 clinical trial of troriluzole in SCA, an inherited form of ataxia, a rare and progressive neurological disease.
- A Phase 2/3 clinical of troriluzole in generalized anxiety disorder.
- A Phase 2/3 clinical of troriluzole in obsessive-compulsive disorder.
Additionally, Biohaven’s first clinical trial from its MPO platform for verdiperstat (formerly known as BHV-3241) is expected to enter a Phase 3 clinical trial in MSA in the third quarter of 2019.
A previous Phase 2 clinical trial of Verdiperstat was observed to be generally well tolerated in a previous Phase 2 clinical trial of patients with MSA, with numerical improvements on the change from baseline Unified MSA Rating Scale.
Patients with MSA have a life expectancy of 6 to 10 years from the time of symptom onset and there are currently no disease modifying treatments available for MSA.
Beyond neurological indications, Biohaven continues to advance the University of Connecticut collaboration as the metallothionein (MT) program non-clinical program supports lead molecule selection.
The stock has been generally rising in response to this news. Recent price action appears to be a retracement in an up trend.
The longer term chart shows the up trend has been persistent.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BHVN 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 BHVN
Every day, we scan the markets looking for trades with 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 BHVN, the June 21 options allow a trader to gain exposure to the stock.
A June 21 $70 call option can be bought for about $5.60 and the June 21 $75 call could be sold for about $3.70. This trade would cost $1.90 to open, or $190 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 $190.
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 BHVN the maximum gain is $3.10 ($75 – $70= $5; $5 – $1.90 = $3.10). This represents $310 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $190 to open this trade.
That is a potential gain of about 63% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.