GSK - Moving Beyond COVID: A  Conservative Options Income Strategy For Moderna

2023-09-21 14:55:48 ET

Summary

• Analysts have soured on Moderna's prospects, despite recent good news in its drug pipeline.
• This put spread strategy risks $4.53 to make $0.47 in 121 days.
• The full premium is earned if MRNA remains above $75 on January 19th, 2024.

This is the third bullish put or put spread idea that we've conducted on Moderna ( Moderna, Inc. (MRNA) Stock Price Today, Quote & News ), the COVID-19 vaccine maker. The first put idea was the $80 put expiring July 15, 2022. This put generated $2.67 in option premium over 164 days. The second put idea targeted the $80 strike expiring January 20, 2023. This put would have generated $3.40 in premium over 197 days, but we closed it early on December 14, 2022, capturing >95% of that premium in 161 days. For this third put spread idea, we're also sharing this with our public readers.

Moderna continues to make significant strides in its messenger RNA platform, positioning itself as a leader in the biotech industry. Just last week, Moderna reported that its mRNA-based experimental flu vaccine, mRNA-1010, showed promising results in a Phase 3 trial, surpassing licensed shots from competitors such as Sanofi's ( SNY ) Fluzone and GSK's ( GSK ) Fluarix. These results are important for Moderna as it tries to move beyond being known only for its blockbuster mRNA Covid vaccine which, as an aside, won more approvals from both U.S. regulators and EU regulators this week.

Meanwhile, the company still awaits approvals for its respiratory syncytial virus (RSV) vaccine, MRNA-1345, having submitted applications to global regulators (including the US, EU, Australia and Switzerland) in July. mRNA-1345 demonstrated vaccine efficacy of 83.7% against RSV lower respiratory tract disease in older adults in a Phase 3 trial.

Moreover, Moderna has embarked on a Phase 3 study of its Merck-partnered bespoke cancer vaccine, targeting patients with a common form of lung cancer. The vaccine regimen, which includes Merck's blockbuster oncology drug Keytruda, has the potential to revolutionize cancer treatment. mRNA-4157 is based on individualized neoantigen therapy (INT), which uses the unique mutational signature of the patient's tumor to design a personalized mRNA sequence. After administration into the patient's body, the mRNA becomes endogenously translated, priming the immune system to recognize and destroy cells possessing the unique tumor mutation signature.

In addition to its vaccine developments, Moderna has been expanding its technology efforts through strategic partnerships. Collaborations with biotech companies like Immatics and Carsgen demonstrate Moderna's commitment to exploring new avenues in cancer research and treatment. These partnerships open doors to novel cancer vaccines and experimental cell therapies, which could have significant market potential.

Overall, Moderna has 47 developmental programs, including 6 in Phase 3 and 7 in Phase 2. However, one significant risk of Moderna is that it still only has one commercial drug, its COVID vaccine.

However, despite its beating on both 2023 Q2 top and bottom lines ( Moderna beats Q2 top and bottom line estimates; updates FY23 outlook ), the street has soured on Moderna's prospects. The company's revenue plunged 94% from a year ago alongside declining COVID-19 infections, and some analysts are worried about the company's future financial health. Last month, Deutsch Bank slashed its price target to $125 from $200 per share, saying that MRNA's net cash position of $8.4B may run out quicker than expected. This was followed by SVB securities cutting its target from $82 to a street-low $68, citing weak demand that may necessitate restructuring and headcount reduction. According to statistics compiled by Seeking Alpha, MRNA's average price target from 23 street analysts is $182.39.

MRNA has dropped significantly from its exuberant highs during the growth stock mania of 2020-2021, and is currently trading at $106.74, not far from its 52-week lows.

MRNA could be a great turnaround story if its new developmental programs work out, and investors with very high conviction in the company may well wish to simply buy the common stock and participate fully in both the upside (and downside) of the stock from here on out.

We specialize in generating income through selling options or option spreads. This is a great option (no pun intended) for those investors who may wish to participate in limited profit movement in the underlying stock, while protecting their investment with a wide margin of safety.

Although MRNA does not pay a dividend, we can generate "yield" from this stock using options. By selling put options on MRNA, we are taking a bullish stance because we are committing to buying MRNA if it declines below the strike price.

This particular bull put spread idea generates $0.47 premium with $4.53 capital requirement from now until January 19th, 2024, with -29.7% margin of safety. In other words, MRNA has to drop -29.7% from today's prices before the first losses are taken.

The trade

(data updated as of September 19, 2023)

The Trade : MRNA Bull Put Spread 65/60 expiring January 19th, 2024, stock price at $106.74

• Sold MRNA $75 Put for $1.39
• Bought MRNA $70 Put for $0.92

Ticker: MRNA

Expiration: January 19th, 2024

Type: Sold Bull Put Spread

Upper Strike Price: $75

Price Move Until Upper Strike: -29.7% decrease

Premium Collected: $0.47 or $47 per contract

Capital Requirement: $5 - $0.47 = $4.53

Days To Expiration: 121 days

Breakeven: $4.53 (Max loss $453 per contract achieved if the stock goes below $70)

Due to the uncertainty of MRNA's product pipeline, I'm going with a wide margin of safety to protect this investment. This bull put spread idea has an upper strike price of $75, which represents a -29.7% margin of safety from the current stock price and which also bring us back to 2020 levels, before MRNA's first COVID vaccines received emergency approval.

The lower strike price is $70, giving a maximum loss of $5 not counting the premium received. Note that most brokers will only withhold the amount of cash or margin to secure your maximum loss, and will not require the entire short leg to be cash-secured because it is protected by the lower-priced long leg.

The put spread expires on January 19th, 2024 which is 121 days from now. The put spread can be sold for $0.47, and with a capital requirement of $4.53 (the difference between the two strike prices, minus the premium received). When calculating the potential return of the option spread, remember to also include the interest rate paid on cash (e.g. 4.83% for Interactive Brokers) as the premium from selling the option is received upfront.

An investor writing this put should be comfortable with any of these three scenarios occurring on the expiry date of November 17th, 2023:

1. MRNA closes above $75 : Both options will expire worthless, and the investor pockets the entire $0.47 premium.
2. MRNA closes between $70 and $75: The investor will be assigned MRNA shares at $75, while the lower put will expire worthless (but you still get to keep the $0.47 option premium, effectively lowering your cost basis to $74.53). The investor also has the option to immediately liquidate the assigned shares at a loss of $0 to $4.53 depending on the price.
3. MRNA closes below $70 : Both puts will be exercised, and the investor will experience the maximum loss of $4.53 (even if MRNA drops to $0).

Remember that each option contract represents 100 shares of the underlying.

Summary

This put spread strategy risks $4.53 to make $0.47 in 121 days. The full premium is earned if MRNA remains above $75 (-29.7% downside protection from the current price) by January 19th, 2024.

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