Vaccine News Creates a Possible 152% Gain
Trade summary: A bull call spread in Sorrento Therapeutics, Inc. (Nasdaq: SRNE) using the October $12 call option which can be bought for about $1.70 and the October $15 call could be sold for about $0.85. This trade would cost $0.85 to open, or $85 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 $85. The maximum gain is $215 per contract. That is a potential gain of about 152% based on the amount risked in the trade.
Now, let’s look at the details.
Benzinga reported SRNE, “which is developing antibody treatments against SARS-CoV-2, said preclinical data showed its COVI-GUARD and COVI-AMG antibodies demonstrated potent neutralizing activities against the virus that caused COVID-19.
Traders seemed to like the news.
The stock gave a buy signal in the stochastic RSI indicator, basically a stochastic calculation that uses the value of RSI rather than the closing price in the formula. The buy signal with the indicator just below the overbought level. In the past the stock has made large up moves after it crosses above 80, the level considered to be the lower bound of an overbought condition.
The report continued, “COVI-GUARD is codenamed STI-1499 and COVI-AMG is codenamed STI-2020.
In pre-clinical cell-based assays, both the antibodies showed 100% in vitro neutralization of SARS-CoV-2 at concentrations of 6 microgram/ml and 78 ng/ml, respectively, the company said. The observed neutralization activity protected against both SARS-CoV and the highly contagious Spike D614G isolate.
Specifically, STI-2020, an affinity-matured version of the COVI-GUARD nAb, showed over 50-fold increase in potency in vitro experiments.
Outlining the key findings, Sorrento said infected hamsters treated with a single dose of 500mcg STI-2020 gained weight within 48 hours of administration compared to control animals that steadily lost weight for five days before recovery.
At day five, all STI-2020-treated hamsters had undetectable virus load in the lungs as compared to the lungs of animals in the control group, where over 1,000 infectious viral particles per gram of tissue were readily detected.
“Based on the preclinical testing we have conducted to date, STI-2020 is our most promising SARS-CoV-2 antibody so far,” Sorrento said.
What’s Next: STI-1499 has been cleared by the FDA for a Phase 1 clinical trial in hospitalized COVID-19 patients.
Sorrento said it will now seek IND approval for commencing the clinical study of STI-2020.
“STI-2020 has the potential to be utilized for both early and late therapeutic interventions, as well as for prophylaxis, with the potential of having a low efficacious dose, which could enable efficient manufacturing and ultimately result in higher affordability for patients,” the company said.”
SRNE has become volatile as it works towards a vaccine. The trading history in the weekly chart below shows this.
That indicates risk is high and traders should strategies to control risk.
A Specific Trade for SRNE
For SRNE, the October 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.
An October $12 call option can be bought for about $1.70 and the October $15 call could be sold for about $0.85. This trade would cost $0.85 to open, or $85 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 $85.
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 SRNE, the maximum gain is $215 ($15- $12= $3; 3- $0.85 = $2.15). This represents $215 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $85 to open this trade.
That is a potential gain of about 152% 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 SRNE 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.