Test Results Provide Potential Big Gains In This Biotech
Biotechs often face make or break moments when test results are announced. A recent example is in a story The Street reported,
“Galapagos NV (Nasdaq: GLPG) rose sharply Friday after the biotechnology company announced positive results for both doses of its rheumatoid arthritis drug, filgotinib, in Phase 3 trials.
Galapagos [jumped] after filgotinib, which is being developed with Gilead Sciences, showed patients improving more than a placebo in attaining an American College of Rheumatology 20% response, according to a company press release.
The ACR20 is the baseline measure to evaluate rheumatoid arthritis treatments in clinical trials so that patients express a 20% improvement in at least three of five criteria determined by the ACR, according to the organization.
Filgotinib also achieved a greater response rate for ACR50 and ACR70 in patients against placebo for its 200mg and 100mg doses. Filgotinib also had a higher percentage of patients reaching the ACR20, ACR50 and ACR70 threshold when treated with methotrexate and monotherapy than with just methotrexate alone.
Gilead increased 2.51% to $65.29 a share Friday on the announcement. The company has added 4.5% since the beginning of the year compared to the S&P 500’s 12.8% gain.
The companies also released reassuring safety results about filgotinib from four of its trials that were consistent with past studies.
“The available safety data from the FINCH and DARWIN 3 studies, which together included more than 2,700 patients receiving filgotinib, suggest that filgotinib has the potential to deliver a much-needed option for treating people living with RA,” said Dr. Walid Abi-Saab, Galapagos Chief Medical Officer.
As part of the partnership between Galapagos and Gilead, filgotinib is being developed to treat other inflammatory indications including psoriatic arthritis, Crohn’s disease and ulcerative colitis.”
The price move on the news pushed the stock to the upper limit of its recent trading range. A break out could lead to a large move in the stock in the long term with a year long trading range indicating a new trend could last for months.
There are also short term trading strategies than can be used with the stock, strategies that could deliver gains that exceed the long term potential in the stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GLPG 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.
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 GLPG
Every day, we scan the markets looking for trades that GLPG 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 GLPG, the April 18 options allow a trader to gain exposure to the stock.
An April 18 $125 call option can be bought for about $2.80 and the April 18 $130 call could be sold for about $1.20. This trade would cost $1.60 to open, or $160 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 $160.
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 GLPG the maximum gain is $3.40 ($130 – $125 = $5; $5 – $1.60 = $3.40). This represents $340 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $160 to open this trade.
That is a potential gain of about 112% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.