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Earnings Season Is Winding Down

Earnings Season Is Winding Down

As earnings season winds down, it can be useful to read the reports of companies that are less well known than the large cap stocks that capture headlines. One example is FibroGen, Inc. (Nasdaq: FGEN) which reported its financial results. Those results sparked selling in the stock.

FGEN daily chart

GlobeNewswire reported that the company announced topline results from the pooled safety analyses of the global Phase 3 program for roxadustat in treating anemia in chronic kidney disease patients across the non-dialysis dependent, newly-initiated dialysis and dialysis-dependent populations, which supported safety of the drug.

However, the company said based on the major adverse cardiovascular event, or MACE, safety analyses, there is no clinically meaningful difference in risk of MACE between roxadustat and Johnson & Johnson’s Procrit, chemically epoetin alfa, in dialysis-dependent patients.

In the pooled analyses of around 4,000 dialysis patients, the upper bound of the 95% confidence interval (CI) was below the pre-specified non-inferiority margin for the time to first MACE+ analyses. Based on the MACE safety analyses of this population, we believe there is no clinically meaningful difference in risk of MACE between roxadustat and epoetin alfa.

In the pooled analyses of about 1,500 incident dialysis patients roxadustat demonstrated superiority to epoetin alfa in the time to first MACE+ in this subpopulation. In the MACE analysis, there is a trend toward reduced risk for patients on roxadustat, compared to epoetin alfa.

In the non-dialysis pool of approximately 4,300 patients, non-inferiority was demonstrated for roxadustat compared to placebo in the time to first MACE+, based on the upper bound of the 95% CI being below the pre-specified non-inferiority margin.

Multiple MACE and MACE+ analyses in non-dialysis from the roxadustat global Phase 3 program are being performed in intent-to-treat (ITT) analyses that demonstrated comparability of roxadustat to placebo. ITT is among the several statistical methods that we will discuss with the FDA. In these ITT analyses, roxadustat was comparable based on a commonly applied non-inferiority margin of 1.3.

The financial results for the quarter showed a net loss for the first quarter of 2019 was $45.4 million, or $0.53 net loss per basic and diluted share, compared to a net loss of $41.4 million, or $0.53 net loss per basic and diluted share one year ago.

At March 31, 2019, FibroGen had $712.7 million in cash, restricted time deposits, cash equivalents, investments, and receivables, compared to $747.2 million at year-end 2018.

The sell off pushed the stock below important support on the weekly chart.

FGEN weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

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.

A Bear Call Spread in FGEN

For FGEN, we could sell a June 21 $35 call for about $3.65 and buy a June 21 $40 call for about $1.50. This trade generates a credit of $2.15, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $70. The credit received when the trade is opened, $70 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $130. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($215).

This trade offers a potential return of about 207% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if FGEN is below $35 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $130 for this trade in FGEN.