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Test Results Move a Stock and Sets Up a Potential Gain

Test Results Move a Stock and Sets Up a Potential Gain

After news was released, shares of Seattle Genetics, Inc. (Nasdaq: SGEN) jumped more than 4.5%.

SGEN daily chart

Business Wire reported the reason behind the price move,

“Seattle Genetics, Inc. and Astellas Pharma Inc. announced initial results from the phase 1 clinical trial EV-103.

Forty-five patients were evaluated for safety with the combination of the investigational agent enfortumab vedotin and the immune therapy pembrolizumab in previously untreated patients with locally advanced or metastatic urothelial cancer who were ineligible for treatment with cisplatin-based chemotherapy.

The study met outcome measures for safety and exhibited encouraging clinical activity for this platinum-free combination in a first-line setting.

The data will be presented during an oral session today at the European Society for Medical Oncology (ESMO) 2019 Congress in Barcelona, Spain (Abstract #901O).

Enfortumab vedotin is a first-in-class antibody drug conjugate (ADC) that targets Nectin-4, a protein present on almost all urothelial tumor cells and associated with cancer formation.

“Advanced urothelial cancer is an aggressive disease for which more options are needed, especially for patients who are ineligible for first-line treatment with cisplatin,” said Dr. Christopher J. Hoimes, Director, Genitourinary Oncology, Case Comprehensive Cancer Center at University Hospitals Seidman Cancer Center, Cleveland, Ohio.

“This study tests the combination of the investigational agent enfortumab vedotin with the PD-1 inhibitor pembrolizumab, in a biomarker unselected population.

Initial results provide support for further development of enfortumab vedotin combinations in this and other settings of urothelial cancer.”

Fifty-one percent of patients (23/45) had an adverse event greater than or equal to Grade 3. Among these events, an increase in lipase was the most frequent (13 percent; 6/45).

Four patients (9 percent) discontinued treatment due to treatment-related adverse events, most commonly peripheral sensory neuropathy. There was one death deemed to be treatment-related by the investigator attributed to multiple organ dysfunction syndrome.

Treatment-related adverse events of clinical interest that were greater than or equal to Grade 3 were rash (11 percent; 5/45), hyperglycemia (7 percent; 3/45) and peripheral neuropathy (4 percent; 2/45); these rates were similar to those observed with enfortumab vedotin monotherapy.

Eleven percent (5/45) of patients had treatment-related immune-mediated adverse events of clinical interest greater than or equal to Grade 3 that required the use of systemic steroids (one event each of pneumonitis, dermatitis bullous, hyperglycemia, tubulointerstitial nephritis, myasthenia gravis).

None of the adverse events of clinical interest were Grade 5 events.

The data demonstrated the combination of enfortumab vedotin plus pembrolizumab shrank tumors in the majority of patients, resulting in a confirmed objective response rate (ORR) of 71 percent (32/45; 95% Confidence Interval (CI): 55.7, 83.6).

The complete response (CR) rate was 13 percent (6/45). Fifty-eight percent (26/45) of patients had a partial response and 22 percent (10/45) had stable disease. Ninety-one percent of responses were observed at the first assessment.

“These data are encouraging and support further exploration of a potential platinum-free combination of pembrolizumab and the investigational agent enfortumab vedotin,” said Roger Dansey, M.D., Chief Medical Officer at Seattle Genetics.

“We are motivated by these results, and we will continue to study enfortumab vedotin alone and in combination with other agents in different stages of urothelial cancer,” said Andrew Krivoshik, M.D., Ph.D., Senior Vice President and Oncology Therapeutic Area Head at Astellas.

The recent gain pushes SGEN to recent highs and a breakout could lead to a sharp move higher for the stock.

SGEN weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying SGEN 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 SGEN

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 SGEN, the October 18 options allow a trader to gain exposure to the stock.

An October 18 $80 call option can be bought for about $2.54 and the October 18 $85 call could be sold for about $1.45. This trade would cost $1.09 to open, or $109 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 $109.

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 SGEN the maximum gain is $3.91 ($85 – $80= $5; $5 – $1.09 = $3.91). This represents $391 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $109 to open this trade.

That is a potential gain of about 258% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.