This Chinese Drug Company Offers Traders an Opportunity to Gain 112%
Trade summary: A bull call spread in BeiGene, Ltd. (Nasdaq: BGNE) using the July $175 call option which can be bought for about $6.22 and the July $180 call could be sold for about $4.62. 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.
BeiGene, Ltd. is principally engaged in biopharmaceutical business. The Company is mainly engaged in the research and development, production and sales of innovative molecularly targeted and immuno-oncology drugs for the treatment of cancer. The Company’s main products include Zanubrutinib (BGB-3111), Tislelizumab (BGB-A317) and Pamiparib (BGB-290).
Recently, GlobeNewswire reported that its BTK inhibitor BRUKINSA™ (zanubrutinib) has received approval from the China National Medical Products Administration (NMPA) in two indications.
The drug was approved for the treatment of adult patients with chronic lymphocytic leukemia (CLL) /small lymphocytic lymphoma (SLL) who have received at least one prior therapy, and the treatment of adult patients with mantle cell lymphoma (MCL) who have received at least one prior therapy.
Both new drug applications (NDAs) were previously granted priority review by the Center for Drug Evaluation (CDE) of the NMPA.
BRUKINSA received accelerated approval from the U.S. Food and Drug Administration (FDA) as a treatment for MCL in adult patients who have received at least one prior therapy in November 2019.
“The concurrent approvals of BRUKINSA in R/R CLL/SLL and R/R MCL are a tribute to the collective expertise and hard work of the BeiGene team. With two product approvals covBGNEng four indications in China and one in the United States in merely seven months, we continue to focus on execution in advancing our broad portfolio,” commented John V. Oyler, Co-Founder, Chief Executive Officer, and Chairman of BeiGene.
“Following in the footsteps of tislelizumab, BRUKINSA is the second BeiGene internally-developed drug approved in China, another significant expansion in our growing commercial portfolio. These approvals would not have been possible without the many clinicians and patients who participated in our trials and the support of the health authorities,” commented Xiaobin Wu, Ph.D., General Manager of China and President of BeiGene.
The stock pulled back to support on the news, providing a potential buying opportunity.
The longer-term chart shows the support coincides with resistance that formed in 2018 and 2019. Once broken, resistance became support and the stock is well-positioned from a technical perspective.
However, like all companies in China, there are risks associated with being in that country. A spread trade can limit risks, especially in high priced stocks.
A Specific Trade for BGNE
For BGNE, the July 19 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 $175 call option can be bought for about $6.22 and the July $180 call could be sold for about $4.62. 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 BGNE, the maximum gain is $3.40 ($180- $175= $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 BGNE 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.