This Biotech Could Provide a Gain of More Than 200%
Trade summary: A bull call spread in Editas Medicine, Inc. (Nasdaq: EDIT) using the August $35 call option which can be bought for about $2.70 and the August $40 call could be sold for about $1.48. This trade would cost $1.22 to open, or $122 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $122. The maximum gain is $378 per contract. That is a potential gain of about 209% based on the amount risked in the trade.
Now, let’s look at the details.
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“As a leading genome editing company, Editas Medicine is focused on translating the power and potential of the CRISPR/Cas9 and CRISPR/Cpf1 (also known as Cas12a) genome editing systems into a robust pipeline of treatments for people living with serious diseases around the world.
EDIT and Azzur Cleanrooms on Demand™ announced the companies have entered a multi-year agreement for current Good Manufacturing Practice (cGMP)-compliant cleanroom space for Editas Medicine in Azzur’s Waltham site.
Editas Medicine will utilize the space and Azzur’s services to execute pre-clinical and early-phase clinical manufacturing activities for its cell medicines, including EDIT-301 in development for the treatment of sickle cell disease and beta thalassemia and EDIT-201, a healthy donor natural killer (HDNK) cell medicine, in development for solid tumor cancers.
“Manufacturing and quality management are both essential components of making medicines.
As we advance several innovative cell medicines towards the clinic and to the patients who are living with diseases of unmet medical need, Azzur Cleanrooms on Demand gives us dedicated manufacturing space for our pre-clinical and early-phase clinical manufacturing activities while providing us with flexibility and control, all in a cGMP-compliant space,” said Harry Gill, Senior Vice President, Operations, Editas Medicine.
“Azzur Cleanrooms on Demand supports production for early-phase partners, helping accelerate their time to clinic and eventually to market, while providing cGMP services, including facility management, asset management, consulting, and materials management services, as needed.
We are excited our solution can help Editas as they advance several innovative medicines to the clinic,” said Ravi Samavedam, President, Azzur Cleanrooms on Demand™.
This news could bring EDIT to the attention of traders. The stock is near its 52-week highs.
The monthly chart shows that momentum is bullish and the stock has been consolidating for some time.
A breakout provides a price target in the mid $40s and a potential double digit gain in the stock. An options trade could deliver a larger gain.
A Specific Trade for EDIT
For EDIT, the August 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.
An August $35 call option can be bought for about $2.70 and the August $40 call could be sold for about $1.48. This trade would cost $1.22 to open, or $122 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 $122.
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 EDIT, the maximum gain is $378 ($40- $35= $5; 5- $1.22 = $3.78). This represents $378 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $122 to open this trade.
That is a potential gain of about 209% 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 EDIT 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.
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.