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FDA Approval Could Fuel a 163% Gain in This Biotech

FDA Approval Could Fuel a 163% Gain in This Biotech

News can create large moves in biotechs. This was recently the case, as Benzinga reported, for Sarepta Therapeutics Inc (Nasdaq: SRPT).

The news site reported, “the FDA has granted accelerated approval for its Vyondys 53, aka golodirsen — an antisense oligonucleotide — for the treatment of Duchenne muscular dystrophy, or DMD, in patients with a confirmed mutation amenable to exon 53 skipping.

Continued approval may be contingent on confirmation of a clinical benefit in the post-marketing confirmatory trial, the company said.

In August, the FDA handed down a complete response to the originally submitted NDA. The company resubmitted the application.

Vyondys 53 is Sarepta’s second exon-skipping RNA therapy, and is likely to treat up to 8% of DMD patients. Along with the already approved EXONDYS 51, the company now offers treatment options for about 20% of DMD patients in the U.S.”

The stock jumped on the news.

SRPT daily chart

Sarepta Therapeutics focuses on the discovery and development of ribose nucleic acid (RNA)-targeted therapeutics for the treatment of rare neuromuscular diseases.

It operates through discovering, developing, manufacturing and delivering therapies to patients with Duchenne muscular dystrophy (DMD). It is focused on the development of its disease-modifying DMD drug candidates.

It has received accelerated approval for its product, EXONDYS 51, indicated for the treatment of DMD in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. EXONDYS 51 is studied in clinical trials under the name of eteplirsen.

Its next generation phosphorodiamidate morpholino oligomer (PMO)-based compounds are synthetic compounds that bind to complementary sequences of RNA by standard Watson-Crick nucleobase pairing. Its PMO-based chemistries are peptide conjugated PMO (PPMO), PMO-X and PMOplus.

The stock has been volatile, drooping from more than 55% from its 2018 high. And news of the recent approval could lead to new highs in the stock.

SRPT weekly chart

However, prior history shows that the stock is volatile and risky. New highs could quickly be followed by heaving selling pressure, perhaps driven by profit taking of short term traders, That means risk should be a primary concern for traders in this stock and risk management should be built into the trade in an effort to limit the downside.

 A Trade for Short Term Bulls

As with the ownership of any stock, buying SRPT 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.

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.

A Specific Trade for SRPT

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 SRPT, the January 17 options allow a trader to gain exposure to the stock.

A January 17 $135 call option can be bought for about $8.10 and the January 17 $140 call could be sold for about $6.20. 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 $1.90.

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 SRPT the maximum gain is $3.10 ($140 – $135= $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% in SRPT based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.