This Volatile Vaccine Maker Could Deliver a 181% Gain
Trade summary: A bull call spread in Novavax, Inc. (Nasdaq: NVAX) using the September $150 call option which can be bought for about $18.95 and the September $155 call could be sold for about $17.64. This trade would cost $1.31 to open, or $131 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 $131. The maximum gain is $369 per contract. That is a potential gain of about 181% based on the amount risked in the trade.
Now, let’s look at the details.
Novavax said it has a deal with SK Bioscience to manufacture the antigen component of its Covid-19 vaccine candidate during the pandemic period. The stock jumped on the news.
Barron’s had details on the announcement.
“Novavax said its development and supply agreement with the South Korean firm will help it supply its vaccine, NVX-CoV2373, to global markets, including South Korea. SK is set to start production this month.
“We are proud to partner with SK bioscience to fulfill our commitment to ensure global supply of NVX-CoV2373 in alignment with our partnership with CEPI,” Novavax CEO Stanley C. Erck said in a news release. The acronym refers to the Coalition for Epidemic Preparedness, a nongovernmental agency that has supplied millions of dollars in funding to help test and develop Novavax’s experimental vaccine.
The companies said they also signed a letter of intent with South Korea’s government to ”work toward broad and equitable access to NVX-CoV2373 for the global market as well as to make the vaccine available in South Korea.”
“SK bioscience shares our sense of urgency to ensure broad and equitable access for our COVID-19 vaccine candidate around the world,” Erck added.
Novavax stock sank 16.8% [the day before the announcement], amid apparent progress for Russia’s vaccine candidate and a U.S. government supply deal with Moderna (MRNA), part of the Trump administration’s Operation Warp Speed plan to fast-track promising Covid-19 vaccines.”
The chart below highlights the stock’s recent volatility.
Barrib;s concluded, “J.P. Morgan analyst Eric Joseph wrote in a note on Wednesday that he didn’t see the Moderna award as fundamentally negative news for Novavax. “Rather, the recent OWS award is more likely a reflection of process and timing, ensuring appropriate resources are matched with manufacturing needs as the gov’t places bets on a portfolio of vaccine options,” Joseph wrote.
He points to six Operation Warp Speed award vaccine recipients thus far, adding up to $10.2 billion in funding. That included the $1.6 billion Novavax announced in July.
Joseph argued NVX-CoV2373 still has a probable best-in-class immunogenicity profile, despite recently encouraging news from Pfizer (PFE) and BioNTech’s (BNTX) candidate, BNT162b1.”
A Specific Trade for NVAX
For NVAX, the September 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 September $150 call option can be bought for about $18.95 and the September $155 call could be sold for about $17.64. This trade would cost $1.31 to open, or $131 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 $131.
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 NVAX, the maximum gain is $369 ($155- $150= $5; 5- $1.31 = $3.69). This represents $369 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $131 to open this trade.
That is a potential gain of about 181% 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 NVAX 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.