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For $82 in Risk, This Trade Could Deliver 409%

For $82 in Risk, This Trade Could Deliver 409%

Trade summary: A bull call spread in Fate Therapeutics, Inc. (Nasdaq: FATE) using the June $35 call option which can be bought for about $1.15 and the June $40 call could be sold for about $0.33. This trade would cost $0.82 to open, or $82 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $0.82. The maximum gain is $418 per contract. That is a potential gain of about 409% based on the amount risked in the trade.

    Now, let’s look at the details.

    FATE is engaged in development of programmed cellular immunotherapies for cancer and immune disorders.

    The company’s cell therapy pipeline consists of immuno-oncology programs, including cancer immunotherapies derived from engineered induced pluripotent cells, and immuno-regulatory programs, including hematopoietic cell immunotherapies for protecting the immune system of patients undergoing hematopoietic cell transplantation and for suppressing autoimmunity.

    Its lead clinical program is ProTmune, which is a programmed immuno-regulatory cell therapy. The company programs immune cells, such as CD34+ cells, Natural Killer (NK) cells and T cells, by utilizing its cell programming approach. Its adoptive cell therapy programs are based on the company’s ex vivo cell programming approach, which it applies to modulate the therapeutic function and direct the fate of immune cells.

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  • The stock was up after FATE announced that the U.S. Food and Drug Administration (FDA) has cleared the Company’s Investigational New Drug (IND) application for FT538, the first CRISPR-edited, iPSC-derived cell therapy.

    FATE daily chart

    GlobeNewswire explained, FT538 is an off-the-shelf natural killer (NK) cell cancer immunotherapy that is derived from a clonal master induced pluripotent stem cell (iPSC) line engineered with three functional components to enhance innate immunity: a novel high-affinity, non-cleavable CD16 (hnCD16) Fc receptor; an IL-15/IL-15 receptor fusion (IL-15RF); and the elimination of CD38 expression.

    The company plans to initiate clinical investigation of three once-weekly doses of FT538 as a monotherapy in acute myeloid leukemia (AML) and in combination with daratumumab, a CD38-directed monoclonal antibody therapy, for the treatment of multiple myeloma.

    FT538 is the fourth off-the-shelf, iPSC-derived NK cell product candidate from the Company’s proprietary iPSC product platform cleared for clinical investigation by the FDA. The Company has initiated clinical manufacture of FT538 at its GMP facility in San Diego, CA.

    “We are very pleased to expand the clinical application of our proprietary iPSC product platform to multiple myeloma, where rates of relapse remain high,” said Scott Wolchko, President and Chief Executive Officer of Fate Therapeutics.

    “Clinical data suggest that deficiencies in NK cell-mediated immunity, which are evident even at the earliest stages of myeloma, continue to accumulate through disease progression.

    We believe administration of FT538 to patients can restore innate immunity, and that the anti-cancer effect of certain standard of care treatments, such as monoclonal antibodies, can be more effective when combined with the engineered functionality of FT538.”

    The rally puts the stock near important resistance. A breakout provides a price target of more than $40 a share.

    FATE weekly chart

    A Specific Trade for FATE

    For FATE, the June 19 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.

    A June 19 $35 call option can be bought for about $1.15 and the June 19 $40 call could be sold for about $0.33. This trade would cost $0.82 to open, or $82 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 $82.

    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 FATE, the maximum gain is $4.18 ($40- $35= $5; 5- $0.82 = $4.18). This represents $418 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $82 to open this trade.

    That is a potential gain of about 409% 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 FATE 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.

    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.

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