This Recent IPO Could Be Set to Move
Initial public offerings, or IPOs, can be frustrating to traders. They are often accompanied by hype and it is possible for traders to believe the hype. Unfortunately, the reality of the company’s prospects may not live up to the hype.
This can result in the stock sliding after it begins trading and the slide can be short lived or could last for months. The stock could even put investors through a series of ups and downs as the trend takes time to become clear. One example of the ups and downs possible in an IPO is seen in the chart of Adaptive Biotechnologies Corporation (Nasdaq: ADPT).
The stock could finally be set to break out and move higher on news that could have a dramatic impact on the company’s finances.
Adaptive Biotechnologies Corporation … announced it has entered into a global agreement with Amgen for the use of Adaptive’s next-generation sequencing (NGS)-based clonoSEQ® Assay to assess minimal residual disease (MRD) across multiple drug development programs within the Amgen hematology portfolio.
Under the terms of the four-year agreement, Adaptive will receive annual development fees in addition to sequencing payments and regulatory milestones in exchange for providing MRD testing and analysis for ongoing and future clinical trials.
“We are excited to continue working with Amgen as their preferred partner to support the development and regulatory approval of novel blood cancer treatments,” said Chad Robins, chief executive officer and co-founder of Adaptive Biotechnologies.
“This pan-portfolio partnership reflects Amgen’s confidence in the role that standardized NGS MRD testing with clonoSEQ plays in demonstrating drug efficacy in clinical trials and in day-to-day patient management.”
The partnership, which began in 2016 to assess MRD in acute lymphoblastic leukemia, demonstrates the increasing utility of MRD assessment in the clinic.
Adaptive will leverage data generated under this partnership to continue building robust evidence that supports MRD as a validated measure of patient outcomes across multiple novel treatments and blood cancers.
“It is critical to know a patient’s MRD status because treating to MRD negativity has been shown to drive better clinical outcomes for patients in a variety of blood cancers,” said Gregory Friberg, M.D., vice president of global development at Amgen.
“Standardized, highly sensitive, molecular detection of MRD using clonoSEQ supports the development of potential cancer therapies that can help patients with blood cancer live longer.”
Traders could consider an options strategy to reduce risk in the still volatile stock.
A Trade for Short Term Bulls
As with the ownership of any stock, buying ADPT 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 has 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.
A Specific Trade for ADPT
Every day, we scan the markets looking for trades with 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 ADPT, the October 18 options allow a trader to gain exposure to the stock.
An October 18 $45 call option can be bought for about $1.75 and the October 18 $50 call could be sold for about $0.72. This trade would cost $1.03 to open, or $103 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 $103.
The maximum gain on the trade in ADPT is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in ADPT the maximum gain is $3.97 ($50 – $45= $5; $5-1.03 = $3.97). This represents $397 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $103 to open this trade.
That is a potential gain of about 285% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.