This Cancer Drug Could Deliver a Short Term, 93% Gain
Many investors expect the value of their stock holdings to double in value in years. If investors expect returns of 10% a year, their investment will take about 7 years to double based on the well known “rule of 72.”
That rule offers a relatively simple way to find how long an investment will take to double at a certain expected annual rate of interest. If an investor divides 72 by the annual rate of return, they find a rough estimate of the number of years it will take for the initial investment to double.
With options, it is possible that investment capital can double quicker than can be expected in stocks since options use leverage.
Recent news about QIAGEN N.V. (NYSE: QGEN) offers an example of the rapid gains possible in the options market.
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QGEN is engaged in providing Sample to Insight solutions that transform biological samples into molecular insights. Its Sample to Insight solutions integrate sample and assay technologies, bioinformatics and automation systems.
Its sample technologies are used for isolating and preparing deoxyribonucleic acid (DNA), ribonucleic acid (RNA) and proteins from blood or other liquids, tissue, plants or other materials.
Its assay technologies make these biomolecules visible for analysis, such as identifying the genetic information of a pathogen or a gene mutation in a tumor. Its bioinformatics solutions interpret data to provide actionable insights.
The company’s automation platforms based on polymerase chain reaction (PCR), next-generation sequencing (NGS) and other technologies tie these together in molecular testing workflows from Sample to Insight.
As Business Wire recently reported,
“[The company] announced a strategic collaboration to develop tissue-based companion diagnostics for Amgen’s investigational cancer treatment AMG 510 to identify patients with cancers that have the KRAS G12C mutation.
The agreement focuses initially on companion diagnostics for non-small cell lung cancer (NSCLC) but allows for further development of the tests for Amgen’s other oncology clinical development programs.
“We are pleased to support Amgen by building on the success of our therascreen platform to develop a tissue-based companion diagnostic to identify patients who would benefit from AMG510. QIAGEN’s
Sample to Insight workflows and experience in developing diagnostic solutions for Precision Medicine are well-suited to help aid in evaluating patients with non-small cell lung cancer,” said Thierry Bernard, Interim CEO of QIAGEN and Senior Vice President, Head of the Molecular Diagnostics Business Area.
“The success of our long-standing collaboration with Amgen is a demonstration of QIAGEN’s capabilities as a preferred partner of pharmaceutical and biotech companies for the creation of companion diagnostics.”
“Amgen is committed to driving broad accessibility to biomarker testing in order to select appropriate patients who will directly benefit from targeted treatments,” said David M. Reese, M.D., Executive Vice President of Research and Development at Amgen.
“With one in eight patients with NSCLC having KRAS G12C, there’s a critical need to improve access to high quality diagnostics and more routine screening.”
The therascreen-based companion diagnostic will screen for KRAS G12C, a genetic mutation that is one of the most common causes of cancer. The RAS gene family, studied for almost 40 years, includes the most frequently mutated oncogenes in human cancers with KRAS being the most prevalent driver mutation in NSCLC.”
The stock moved up on the news. The chart shows that QGEN is volatile.
The stock could be bottoming but risk should be considered and managed in a stock with this much volatility.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up-trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for QGEN
Every day, we scan the markets looking for trades that carry 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 QGEN, a bull put spread could be opened with the May 15 put options. This trade can be opened by selling the May 15 $40 put option for about $5.20 and buying the May 15 $34 put for about $2.30.
This trade would result in a credit of $2.90, or $290 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $6 ($40 – $34). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $310 ($600 – $290).
The potential gain in QGEN is about 93% of the amount of capital risked. This trade will be open for a relatively short amount of time and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.