By: Steve Smith
A few weeks ago, on July 15th to be exact, I issued an Alert to Options360 members, recommending a bearish position in “Moderna (MRNA)”, a biotech company that seemed to have the inside line towards a COVID-19 vaccine. The stock, which for years, had been dormant in the low $20 range, starting powering higher in the beginning of March — reaching a momentary peak near $90 ( a 350% gain) by late May.
I don’t usually trade biotechs because of the binomial outcomes, pass or fail on a single trial, issues and implications surrounding COVID meant I should keep an eye on the sector. What I found with MRNA is a company that has never, and I repeat never, had a product approved through a Phase III trial, let alone brought a drug to market. I’m not here to cast aspersions on their business practices. But, merely stating a fact.
COVID presented an opportunity to over-promise — and thus far underdeliver — allowing management to stick its snout in the funding draw. Between April and June MRNA insiders sold over $30 million in shares, even as the company was being awarded $1.3 billion by the government as part of the warp speed project.
Unfortunately, they failed to disclose this windfall and other items such as not having a patent on the technology they claimed. When this last round funding hit the new in mid-July and shares spiked above issued this Alert to Options360 members
July 15 MRNA Bear
MRNA released results of a drug trial, suggesting they may be hot on the trail of a vaccine for Covid#19. Phht. This company has never taken a drug through the complete approval process or taken one to market. Management is known as promoters. The trial was still just a couple hundred people. And most of them got sick. Also, the chart now has a double top from the time they told their last lie.
The trade recommendation at the time was to establish a bearish position through the purchase of a put spread; specifically, buy the October 70 put and sell the October 55 Put for a $5.80 net debit.
-Buy to open 1 contract MRNA October (10/16) 70 Put
-Sell to open 1 contract MRNA October (10/16) 55 Put
For a Net Debit $5.80 (+/-0.20)
The notion was this would be a ‘set it and forget’ position, meaning I had an opinion the stock would be heading lower and there would be no reason to make adjustments. But, as MRNA shares began drifting below $75, then $70 and now $65. I saw an opportunity to reduce my cost basis and basically guarantee a profit.
So I engaged in selling “inside put spreads” or those that have a shorter duration and narrower strikes than the original October 70/55 strikes. In this way, I collected three rounds of premium to bring cost basis of the original position down to just $1.40
Today with the stock hitting a new low of $63 I made what will be my final adjustment. I sold the Sep (9/18) 60/55 put spread for a $1.70 credit turning the original position, which initially cost $580 per contract) into a net credit of $40 per contract. This means the position cannot lose!
If shares drop below $55 the October 70/55 spread will be worth $15 while the short Sep 60/55 spread will be worth $5 netting a $1,000 or 75% gain. And the best part is I no longer have any risk.
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