This Cancer Drug Could Push NovoCure Higher
Trade summary: A bull call spread in NovoCure Limited (Nasdaq: NVCR) using the December $130 call option which can be bought for about $9 and the December $135 call could be sold for about $6.65. This trade would cost $2.35 to open, or $235 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 $235. The maximum gain is $265 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.
According to a press release on Business Wire,
NVCR, “a global oncology company working to extend survival in some of the most aggressive forms of cancer, today announced that it has received the CE Mark for the NovoTTF-100L system from the Notified Body (TÜV).
The application of the CE mark enables Novocure to commercialize the device as a first-line treatment in combination with pemetrexed and platinum-based chemotherapy for unresectable, locally advanced or metastatic, malignant pleural mesothelioma (MPM) in the European Union and Switzerland.”
Traders seemed pleased with the news as the price of the stock moved higher.
The press release continued, “MPM is a rare cancer that has been strongly linked to asbestos exposure. More than 13,000 people are diagnosed with mesothelioma in Europe annually. The U.S. FDA approved the NovoTTF-100L System (known as Optune Lua™ in the U.S.) as a treatment for MPM in May 2019 under the Humanitarian Device Exemption (HDE) pathway.
Optune Lua was the first treatment for MPM approved by the FDA in more than 15 years. Prior to the FDA approval of NovoTTF-100L, pemetrexed plus cisplatin was the only FDA-approved therapy for patients with unresectable MPM. Now having the CE mark for its MPM therapy in Europe, Novocure will begin commercialization and to identify and pursue pathways for reimbursement in selected markets.
“We are extremely pleased to have CE marking for our NovoTTF-100L System, making our therapy commercially available for patients with MPM in Europe,” said Pritesh Shah, Novocure’s Chief Commercial Officer. “Obtaining the CE mark for our NovoTTF-100L System represents another step forward on our patient-forward mission of striving to extend survival in some of the most aggressive forms of cancer. Our commercial team in EMEA is now focused on establishing pathways for reimbursement to expand access to our therapy for MPM patients.”
The longer term chart using weekly data shows that NVCR has been consolidating recent gains and could be setting up for another move higher.
A Specific Trade for NVCR
For NVCR, the December options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A December $130 call option can be bought for about $9 and the December $135 call could be sold for about $6.65. This trade would cost $2.35 to open, or $235 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 $235.
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 NVCR, the maximum gain is $265 ($135- $130= $5; 5- $2.35 = $2.65). This represents $265 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $235 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 NVCR 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 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.