This Vaccine Maker Still Has Triple Digit Potential for Investors
Trade summary: A bull call spread in Moderna Inc. (Nasdaq: MRNA) using the December $125 call option which can be bought for about $13.30 and the December $130 call could be sold for about $11.20. This trade would cost $2.10 to open, or $210 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 $210. The maximum gain is $290 per contract. That is a potential gain of about 138% based on the amount risked in the trade.
Let’s look at the details:
Business Wire reported that, “Moderna, Inc. (Nasdaq: MRNA), a biotechnology company pioneering messenger RNA (mRNA) therapeutics and vaccines to create a new generation of transformative medicines for patients, announced a supply agreement with the UK government for an additional 2 million doses of mRNA-1273, Moderna’s vaccine candidate against COVID-19, to the United Kingdom beginning in March 2021.”
MRNA was up on the news.
The UK government has now secured 7 million doses of mRNA-1273. This confirmation comes as the UK continues its efforts to secure access to safe and effective COVID-19 vaccines by establishing a broad portfolio of the most promising vaccines.
“We appreciate the collaboration with the UK government as with many other governments and other key partners around the world,” said Stéphane Bancel, Chief Executive Officer of Moderna.
“For almost a decade, Moderna has invested in creating and developing a novel platform for designing and manufacturing a new class of mRNA-based vaccines. We are proud of the progress on mRNA-1273 we have made to date including the positive interim analysis from our Phase 3 COVE study.”
On November 16, Moderna announced that the independent, NIH-appointed Data Safety Monitoring Board (DSMB) for the Phase 3 study of mRNA-1273, its vaccine candidate against COVID-19, has informed Moderna that the trial has met the statistical criteria pre-specified in the study protocol for efficacy, with a vaccine efficacy of 94.5%.
This study, known as the COVE study, enrolled more than 30,000 participants in the U.S. and is being conducted in collaboration with the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health (NIH), and the Biomedical Advanced Research and Development Authority (BARDA), part of the Office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services.
On October 27, 2020, Moderna received confirmation that the Medicines and Healthcare products Regulatory Agency (MHRA) in the United Kingdom started the rolling review process of mRNA-1273.
MRNA continues to scale up its global manufacturing to be able to deliver approximately 500 million doses per year and possibly up to 1 billion doses per year, beginning in 2021.
The Company is working with its strategic manufacturing partners, Lonza of Switzerland and ROVI of Spain, for manufacturing and fill-finish outside of the United States. This is a dedicated supply chain to support Europe and countries other than the United States that enter into purchase agreements with Moderna.
MRNA is extended as the weekly chart below shows and risk should be managed when trading stocks after sharp rallies.
A Specific Trade for MRNA
For MRNA, 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 $125 call option can be bought for about $13.30 and the December $130 call could be sold for about $11.20. This trade would cost $2.10 to open, or $210 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 $210.
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 MRNA, the maximum gain is $290 ($130- $125= $5; 5- $2.10 = $2.90). This represents $290 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $210 to open this trade.
That is a potential gain of about 138% in MRNA 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 MRNA 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.