This Biotech Is a Possible Triple Digit Gain
Trade summary: A bull call spread in BioNTech SE (Nasdaq: BNTX) using the July $70 call option which can be bought for about $7.90 and the July $75 call could be sold for about $6.30. This trade would cost $1.60 to open, or $160 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 $160. The maximum gain is $340 per contract. That is a potential gain of about 112% based on the amount risked in the trade.
Now, let’s look at the details.
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“BNTX, a clinical-stage biotechnology company focused on patient-specific immunotherapies for the treatment of cancer and infectious diseases, today announced a private investment of USD 250 million (EUR 223 million) by Temasek and other accredited investors.
The private placement includes an investment of approximately USD 139 million in ordinary shares and a USD 112 million investment in 4-year mandatory convertible notes.
“We are pleased to welcome Temasek onboard as a new shareholder. We believe their long-term investment approach, global presence, and deep experience in the biotechnology field are a good fit with our vision to build a leading global biopharmaceutical company,” said Ugur Sahin, CEO and Co-founder of BioNTech.”
The stock broke above resistance on the news, potentially completing a basing pattern that extends into April. The potential price target based on that pattern is almost $80.
BioNTech SE is a Germany-based clinical-stage biotechnology company. The company develops a broad product pipeline using different scientific approaches and technology platforms, including individualized mRNA-based product candidates, chimeric antigen receptor T-cells, checkpoint immunomodulators, targeted cancer antibodies and small molecules.
In addition, the company offers diagnostic products and drug discovery services for other therapeutic areas, including infectious diseases, allergies and autoimmune disorders.
The stock has just a short trading history as the next chart shows.
The price trend since the company’s initial public offering late last year has generally been up. However, the stock has been volatile which can generally be explained by the small size of the company and its industry group.
With a market cap of less than $15 billion, BNTX will be prone to relatively high volatility as traders react to news. And news can be market moving in the Biotechnology & Medical Research industry group.
Volatility presents risks and traders should consider risks when making trading decisions. A spread trade can reduce risk, in fact this strategy can be used to strictly limit risks to a precise dollar level.
A Specific Trade for BNTX
For BNTX, the July 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.
A July $70 call option can be bought for about $7.90 and the July $75 call could be sold for about $6.30. 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 BNTX, the maximum gain is $340 ($75- $70= $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.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BNTX 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.