Fast Track Drug Designation Could Deliver a 163% Gain
Trade summary: A bull call spread in United Airlines Holdings, Inc. (Nasdaq: TPTX) using the October $80 call option which can be bought for about $7.85 and the October $85 call could be sold for about $5.95. This trade would cost $1.90 to open, or $190 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $190. The maximum gain is $310 per contract. That is a potential gain of about 163% based on the amount risked in the trade.
Now, let’s look at the details.
GlobeNewswire carried the announcement that the Food and Drug Administration (FDA) granted a third Fast-Track designation to its lead drug candidate, repotrectinib.
Traders seemed to believe the news was bullish.
Turning Point Therapeutics is a precision oncology company developing next-generation therapies that target genetic drivers of cancer.
The designation was granted for the treatment of patients with advanced solid tumors that have an NTRK gene fusion who have progressed following treatment with at least one prior line of chemotherapy and one or two prior TRK tyrosine kinase inhibitors (TKIs) and have no satisfactory alternative treatments.
Repotrectinib was previously granted two Fast Track designations for the treatment of ROS1-positive advanced non-small cell lung cancer patients, first for patients with one prior line of platinum-based chemotherapy and one prior ROS1 TKI, and second for patients without prior ROS1 TKI treatment.
There are no approved targeted therapies for patients previously treated with another ROS1 or TRK TKI.
“We believe repotrectinib has the potential to make a meaningful difference in the lives of cancer patients with ROS1- or NTRK-driven tumors and are pleased to receive our third Fast-Track designation that may help expedite its development,” said Athena Countouriotis, M.D., president and chief executive officer.
“NTRK-driven cancers are estimated to occur in up to 50,000 patients annually, however there are currently no approved therapies for those patients previously treated with another TRK TKI.”
Turning Point recently reported early interim data from its registrational Phase 2 TRIDENT-1 study of repotrectinib, showing a confirmed objective response rate of 50 percent (3/6) in the cohort of NTRK-positive TKI-pretreated advanced solid tumor patients.
A total of 40 patients are planned for enrollment in this cohort, and the FDA recently provided guidance that 6 months of follow up from the last response in this cohort may be sufficient to support potential approval.
Previous guidance was 12 months. This recent guidance and Fast-Track designation may provide a faster path to potential approval.
TPTX has been trading for a little more than a year. After an extended trading range, the stock has been in an uptrend since March.
A Specific Trade for TPTX
For TPTX, the October 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.
An October $80 call option can be bought for about $7.85 and the October $85 call could be sold for about $5.95. 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 TPTX, the maximum gain is $310 ($85- $80= $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 163% 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 TPTX 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 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.