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This Trade Could Deliver Immediate Income

This Trade Could Deliver Immediate Income

Alnylam Pharmaceuticals (Nasdaq: ALNY) is a biotech company that recently reported earnings. As Business Wire reported, the company reported a loss of $181.9 million in its first quarter.

The company is, however, cash rich, reporting that it had cash, cash equivalents and marketable debt securities and restricted investments of $1.29 billion, as compared to $1.13 billion at December 31, 2018.

The increase came after Alnylam sold an aggregate of 5,000,000 shares of its common stock through an underwritten public offering at a price to the public of $77.50 per share. As a result of the offering, Alnylam received aggregate net proceeds of approximately $382 million.

Management noted, “The first quarter of 2019 and recent weeks were a remarkable period of advancement for Alnylam toward our goal of building a leading biopharmaceutical company.

Specifically, we demonstrated good progress in global commercialization of ONPATTRO, continued success in our R&D efforts with positive Phase 3 results for givosiran, and a strong commitment to future pipeline growth through our landmark ocular and CNS disease alliance with Regeneron.

In addition, we significantly strengthened our balance sheet through both an equity offering in January and partnership-based equity funding and cash that we’ll receive upon closing of the Regeneron transaction,” said John Maraganore, Ph.D., Chief Executive Officer of Alnylam.

“We believe we are now well positioned to achieve our Alnylam 2020 goal of building a multi-product, global biopharma company with a deep clinical pipeline for future growth and a robust product engine for sustainable innovation, a profile rarely achieved in our industry.

Moreover, as evidenced by the success of our ONPATTRO launch and the results of our givosiran Phase 3 study in porphyria, we believe we’re delivering on our most important goal of bringing potentially transformative medicines to patients.”

“With over 400 patients on commercial product, we’re very pleased with our team’s launch execution in over 10 countries where ONPATTRO is now available, and we look forward to continued growth in all existing and many new countries in the months to come,” added Barry Greene, President of Alnylam.

“As we reported last night, we believe an important highlight in our commercialization efforts is the innovation we’ve demonstrated with regard to patient access. Indeed, with 10 value-based agreements now completed in the U.S. and with favorable HTA ratings and reimbursement outcomes in key EU countries, we’re advancing our goal to ensure that ONPATTRO reaches all patients in need.”

Traders seemed to sell the news.

ALNY daily chart

The stock appears to be in a down trend and that could create a trading opportunity.

ALNY weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

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.

A Bear Call Spread in ALNY

For ALNY, we could sell a June 21 $75 call for about $6.50 and buy a June 21 $80 call for about $3.90. This trade generates a credit of $2.60, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $260. The credit received when the trade is opened, $260 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $240. The risk can be found by subtracting the difference in the strike prices ($500 or $2.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($260).

This trade in ALNY offers a potential return of about 108% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if ALNY is below $75 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $240 for this trade in ALNY.