December 20, 2022
Moderna (MRNA), the company of COVID vaccine fame, announced this week that a cancer vaccine, in combination with a Merck (MRK) drug, showed positive results in a trial on melanoma patients. The stock jumped 20% on the news but then pulled back amid the overall market swoon.
Oddly, the stock received a downgrade and a target price increase from the same analyst after the news. I guess he wants to cover his bets. But that reflects the opinion of the greater analyst community, where only half the recommendations are a buy or better. Moreover, the average target price is just $210, which is a mere 8.6% above Friday’s close. That’s closer than most stocks, meaning analysts will likely not hit the stock with damaging target price decreases to compensate for not lowering their target throughout the bear market. In other words, the target price is perfectly reasonable, unlike most stocks.
On the chart, MRNA had been trading sideways for a month amid an intermediate-term uptrend that pulled the shares 50% higher. But the big pop this week shot the stock up to its highest level since January. In addition, the shares pulled away from their rising 20-day moving average, a trendline the stock had been clinging to.
This trade is based on MRNA continuing to gain on the heels of its trial report. This is consistent with the options market, where out-of-the-money (OTM) calls are more expensive than equally OTM puts. Note also that the 20-day (blue line) sits above the strike of our spread’s short put at $175 (red line). If you agree that MRNA will continue its rally – or at least remain atop the 20-day – consider the following trade that relies on the stock staying above $175 through expiration in five weeks:
Buy to Open the MRNA 20 Jan 170 put (MRNA230120P170)
Sell to Open the MRNA 20 Jan 175 put (MRNA230120P175) for a credit of $1.35 (selling a vertical)
This credit is $0.02 less than the mid-point price of the spread at Friday’s $193.29 close. Unless MRNA surges quickly, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $133.70. This trade reduces your buying power by $500, making your net investment $366.30 per spread ($500 – $133.70). If MRNA closes above $175 on Jan. 20, both options will expire worthless and your return on the spread would be 37% ($133.70/$366.30).