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Seasoned IPOs Can Be Safer Trades Than Uber

Seasoned IPOs Can Be Safer Trades Than Uber

Investors were reminded, once again, that risks can be high when companies complete initial public offerings. It could be best to let IPOs season pass and allow the initial excitement to fade. The chart of Moderna (Nasdaq: MRNA) could show the typical IPO pattern.

MRNA daily chart

Notice the decline after the first day of trading. That is common and presents a better entry point. News about the company can also provide entry points for trades.

Moderna is advancing messenger RNA (mRNA) science to create a new class of transformative medicines for patients. mRNA medicines are designed to direct the body’s cells to produce intracellular, membrane or secreted proteins that can have a therapeutic or preventive benefit and have the potential to address a broad spectrum of diseases.

Moderna’s platform builds on continuous advances in basic and applied mRNA science, delivery technology and manufacturing, providing Moderna the capability to pursue in parallel a robust pipeline of new development candidates. Moderna is developing therapeutics and vaccines for infectious diseases, immuno-oncology, rare diseases and cardiovascular diseases, independently and with strategic collaborators.

Business Wire reported some of the company’s operational highlights:

  • Rare Diseases: New development candidate announced for glycogen storage disease type 1a (GSD1a), a rare metabolic disorder; Company now has five rare disease programs in its pipeline.
  • Immuno-Oncology: Two personalized cancer vaccine (PCV) abstracts to be presented at the 2019 ASCO
  • Infectious Diseases: Merck submitted an IND for mRNA-1172, a more potent RSV vaccine development candidate; development paused for first RSV candidate, mRNA-1777

“We continue to execute against our corporate objectives as we progress clinical studies across our development portfolio, introduce a new mRNA rare disease development candidate and focus on identifying additional modalities and disease targets,” said Stéphane Bancel, Moderna’s chief executive officer.

“We are excited to pursue a treatment to potentially address the underlying cause of glycogen storage disease type 1a, and we believe this candidate also reflects the continued productivity of our mRNA platform.

At yesterday’s annual Science Day event, we presented new insights into our mRNA and delivery science, including the potential delivery of mRNA to white blood cells. While our team has additional research to perform in this area, we look forward to being able to bring new candidates into development as we continue working to help patients with a wide range of serious diseases.”

Moderna currently has 21 mRNA development candidates in its portfolio with 11 in clinical studies. Across Moderna’s pipeline, more than 1,000 subjects have been enrolled in clinical studies.

The company has ample cash to fund operations. Cash, cash equivalents and investments as of March 31, 2019 and December 31, 2018 were $1.55 billion and $1.69 billion, respectively. Net cash used in operating activities was $143.9 million for the three months ended March 31, 2019 compared to $111.4 million for the three months ended March 31, 2018.

Total revenue was $16.0 million for the three months ended March 31, 2019 compared to $29.0 million for the three months ended March 31, 2018. Research and development expenses were $130.6 million for the three months ended March 31, 2019 compared to $90.1 million for the three months ended March 31, 2018.

This resulted in a net loss which was $132.7 million for the three months ended March 31, 2019 compared to $72.4 million for the three months ended March 31, 2018.

The stock rallied on the news and could push towards recent highs.

MRNA weekly chart

 A Trade for Short Term Bulls

As with the ownership of any stock, buying MRNA 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 MRNA

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 MRNA, the July 19 options allow a trader to gain exposure to the stock.

A July 19 $25 call option can be bought for about $2.39 and the July 19 $30 call could be sold for about $0.85. This trade would cost $1.54 to open, or $154 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 $154

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 MRNA the maximum gain is $3.46 ($30 – $25 = $5; $5 – $1.54 = $3.46). This represents $346 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $154 to open this trade.

That is a potential gain of about 124% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.