Sell the News Could Deliver a Nice 94% Gain To You
Trade summary: A bear call spread in uniQure N.V. (Nasdaq: QURE) using July $45 call options for about $6.70 and buy a July $50 call for about $3.40. This trade generates a credit of $3.30, which is the difference in the amount of premium for the call that is sold and the call.
In this trade, the maximum risk is about $170. 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 ($330). This trade offers a potential return of about 94% of the amount risked.
Now, let’s look at the details.
Traders often say, “buy the rumor, sell the news.” This means that traders tend to price in significant developments before they occur. When news is finally announced, stocks at times sell off because the news doesn’t always measure up to the expectations traders had.
An example can be seen in the chart below. Shares of UniQure fell after the company announced that CSL Behring would acquire exclusive commercialization rights to its gene-therapy program.
GlobeNewswire provided details, “QURE, a leading gene therapy company advancing transformative therapies for patients with severe medical needs, [recently] announced that uniQure and CSL Behring have entered into a licensing agreement providing CSL Behring with exclusive global rights to etranacogene dezaparvovec, uniQure’s investigational gene therapy for patients with hemophilia B.
Etranacogene dezaparvovec consists of an AAV5 viral vector carrying a gene cassette with the patent-protected Padua variant of Factor IX (FIX-Padua).
Under the terms of the agreement, uniQure will receive a $450 million upfront cash payment and be eligible to receive up to $1.6 billion in payments based on regulatory and commercial milestones.
uniQure will also be eligible to receive tiered double-digit royalties in a range of up to a low-twenties percentage of net product sales arising from the collaboration.
The collaboration leverages CSL Behring’s strong global reach and commercial infrastructure in hematology to accelerate access of etranacogene dezaparvovec to hemophilia B patients around the world.
“We are thrilled to enter into this commercialization and license agreement with CSL Behring, an ideal commercial partner with global reach and decades of expertise in hemophilia,” stated Matt Kapusta, chief executive officer of uniQure.
“We believe that through this arrangement, we are ideally positioned to deliver globally our innovative gene therapy to the largest number of hemophilia B patients as quickly as possible.”
The sell off in the stock comes as the stock forms a possible triple top which can be seen in the chart below which uses weekly data. That indicates significant resistance near the recent highs and the stock could continue significantly lower.
Shorting shares of the stock to gain exposure to price declines exposes traders to significant risks in dollar terms. A spread trade with options allows traders to obtain exposure to the stock with a defined level of risk. That strategy is explained in detail below, at the end of this article.
A Specific Trade for QURE
For QURE, we could sell a July $45 call for about $6.70 and buy a July $50 call for about $3.40. This trade generates a credit of $3.30, 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 $330. The credit received when the trade is opened, $330 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $170. 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 ($330).
This trade offers a potential return of about 94% 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 QURE is below $45 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 $170 for this trade in QURE.
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.
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.