For Biotechnology: Some Option Strategies For July (NASDAQ: VIR)

Stock Market


An organ made from a collage of flower petals and leaves.  (Brain)

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I covered Vir Biotechnology (VIR) many times before. Vir’s angle is that it develops a monoclonal antibody or mAb named sotrovimab which targets the SARS-COV2 virus in a highly conserved domain. Therefore, it is effective against emerging variants of the virus.

Vaccines are still the main defense against the virus; however, when a new variant emerges, it takes 3-6 months to tweak the vaccine to fit the variant. Those 3-6 months, the world remains vulnerable to the new variant. This is where sotrovimab comes into play. Since it works in a domain conserved across variants, it can provide a stop-gap measure to doctors while a new vaccine gets developed.

Sotrovimab is partnered with GlaxoSmithKline (GSK). Earlier, it only had an IV version, which required hospital visits. Vir has developed an intramuscular version which can be given outside a hospital, making it much more user-friendly.

In the next 6 months, Vir’s prospects will rise and fall with new variants. If the virus does not produce new variants – which seems highly unlikely – Vir will not have a market. In such a case, I do not expect the price to have any significant increase. However, 52-week low being approximately $ 30, I do not think there is significant risk of the price falling below that. Even if it does, it will not crash. If the virus keeps mutating – as is likely – then Vir’s technology will become important. Under such circumstances, I expect the price to shoot up to as much as $ 55 (highest available strike price for both call and put options).

So let me discuss an option strategy that may hedge against either scenario. Assuming a six-month conservative forward price range of $ 32.5 to $ 42.5, and a more optimistic range of upto $ 52.5, I have formed option trading strategies by considering call and put options of July 15th, 2022. I have tried out covered call, butterfly spread , strangle and straddle, strips and straps, vertical bullish spread and vertical bearish spread. The pay off from different option trading strategies are listed and analyzed.

For options

For options (seekingalpha.com/symbol/VIR/options)

Source: For Biotechnology, Inc. Calls & Puts Options

Expecting the stock to trade within a range of $ 32.5 and $ 42.5, strangle and straddle provide a positive cash flow with cushion of significant upward or downward price movement. To be more specific, these strategies can provide positive cash flow in between an approximate range of $ 20 to $ 55, a range that is almost impossible to cross within six months. The same can also be said about strips. In addition to that, the profit potential of strips is much higher than strangle and straddle.

All these three strategies guarantee a profit of more than $ 11.5 in the most likely price range ie $ 32.5 to $ 42.5. If the investor is interested in earning substantial income without any hassle, these three strategies will be quite useful for them. A bullish investor can easily select any of these three strategies, given my future outlook about Vir Biotechnology, Inc.

The covered call also generates substantial profit with a break even of $ 27.1, and can generate a maximum profit of $ 15.4. However it requires an initial investment of $ 27.1 as opposed to the earlier strategies with zero investment or rather getting income on the very beginning. Covered call will be a good strategy for investors who are willing to cover their naked position of investing in its stock.

Thus, depending on the requirements of the investors, we have plenty of strategies to choose from strangle, straddle, strips, and covered call. All these strategies have very low breakeven points. Out of these four, strips generate maximum return with minimum or no investment. Strips at $ 40 will also generate a profit as high as $ 28.37 at a price point of $ 40. The breakeven of strips is $ 26.63 on the lower side, and $ 68.37 on the upper side.

Strategy

As we are quite optimistic of VIR not trading below or near to its 52-week low of $ 29.48, our desired strategy will be a strips in which we recommend investors to sell one VIR July 15 call at $ 40 per share, and sell two VIR July 15 put option at $ 40 per share at a premium of $ 5.43 and $ 11.47 (for each put) respectively, thus having an initial cash inflow of $ 28.37.

Pay-Off Tables (data sourced from Seeking Alpha, arranged by author)

Covered Call:

Buying VIR stock @ $ 31.5 and writing a VIR July 15 call option at $ 42.5 per share, and at a premium of $ 4.4, thus having an initial cash outflow of $ 27.1

Market Price

Cash Inflow from Stock

Cash Inflow from Option

Cash Outflow

Net Cash Flow

25.0

25.0

0

27.1

-2.1

27.5

27.5

0

27.1

0.4

30.0

30.0

0

27.1

2.9

32.5

32.5

0

27.1

5.4

35.0

35.0

0

27.1

7.9

37.5

37.5

0

27.1

10.4

40.0

40.0

0

27.1

12.9

42.5

42.5

0

27.1

15.4

45.0

45.0

-2.5

27.1

15.4

47.5

47.5

-5.0

27.1

15.4

50.0

50.0

-7.5

27.1

15.4

Butterfly Spread:

Buying one call option at a higher strike price, buying one call option at a lower strike price, and selling two call options at the same intermediate strike price. The options are of the same expiration date, and on the same underlying asset. Here, the person is trying to play safe and is neither bullish nor bearish.

Eg buying VIR July 15 call at $ 35 per share, buying VIR July 15 call at $ 45 per share and selling two VIR July 15 call options at $ 40 per share at a premium of $ 7.1, $ 4.4, $ 5.43 respectively, having an initial cash outflow of $ 0.64 .

Market Price

Cash Inflow from $ 35 Call

Cash Inflow from $ 45 Call

Cash Inflow from $ 40 Call

Initial Cash Inflow

Net Cash Flow

25.0

0

0

0

-0.64

-0.64

27.5

0

0

0

-0.64

-0.64

30.0

0

0

0

-0.64

-0.64

32.5

0

0

0

-0.64

-0.64

35.0

0

0

0

-0.64

-0.64

37.5

2.5

0

0

-0.64

1.86

40.0

5.0

0

0

-0.64

4.36

42.5

7.5

0

-5

-0.64

1.86

45.0

10.0

0

-10

-0.64

-0.64

47.5

12.5

2.5

-15

-0.64

-0.64

50.0

15.0

5.0

-20

-0.64

-0.64

Strangle:

Buying / selling a call and put option with different exercise price and the same expiration date. The strike price of the call option should be higher than the strike price of the put option.

Eg selling a VIR July 15 call at $ 42.5 per share, and selling a VIR July 15 put at $ 32.5 per share at a premium of $ 4.4 and $ 7.4, respectively, thus having an initial cash inflow of $ 11.8.

Market Price

Cash Inflow from Call

Cash Inflow from Put

Initial Cash inflow

Net Cash Flow

25.0

0

-7.5

11.8

4.3

27.5

0

-.5.0

11.8

6.8

30.0

0

-2.5

11.8

9.3

32.5

0

0

11.8

11.8

35.0

0

0

11.8

11.8

37.5

0

0

11.8

11.8

40.0

0

0

11.8

11.8

42.5

0

0

11.8

11.8

45.0

-2.5

0

11.8

9.3

47.5

-5.0

0

11.8

6.8

50.0

-7.5

0

11.8

4.3

Straddle:

Buying / selling a call and put option with the same exercise price and the same expiration date.

Eg selling VIR July 15 call at $ 37.5 per share, and selling a VIR July 15 put option at $ 37.5 per share at a premium of $ 6.07 and $ 10.5, respectively, thus having an initial cash inflow of $ 16.57.

Market Price

Cash Inflow from Call

Cash Inflow from Put

Initial Cash inflow

Net Cash Flow

25.0

0

-12.5

16.57

4.07

27.5

0

-10.0

16.57

6.57

30.0

0

-7.5

16.57

9.07

32.5

0

-.5.0

16.57

11.57

35.0

0

-2.5

16.57

14.07

37.5

0

0

16.57

16.57

40.0

-2.5

0

16.57

14.07

42.5

-5.0

0

16.57

11.57

45.0

-7.5

0

16.57

9.07

47.5

-10.0

0

16.57

6.57

50.0

-12.5

0

16.57

4.07

Strips:

Buying / selling a call option and two put options with the same exercise price and the same expiration date.

Eg selling one VIR July 15 call at $ 40 per share, and selling two VIR July 15 put option at $ 40 per share at a premium of $ 5.43 and $ 11.47 (for each put) respectively, thus having an initial cash inflow of $ 28.37.

Market Price

Cash Inflow from $ 40 Call

Cash Inflow from two $ 40 Put

Initial Cash inflow

Net Cash Flow

25.0

0

-30.0

28.37

-1.63

27.5

0

-25.0

28.37

3.37

30.0

0

-20.0

28.37

8.37

32.5

0

-15.0

28.37

13.37

35.0

0

-10.0

28.37

18.37

37.5

0

-5.0

28.37

23.37

40.0

0

0

28.37

28.37

42.5

-2.5

0

28.37

25.87

45.0

-5.0

0

28.37

23.37

47.5

-7.5

0

28.37

20.87

50.0

-10.0

0

28.37

18.37

Straps:

Buying / selling two call options and one put option with the same exercise price and the same expiration date.

Eg selling 2 VIR July 15 call at $ 35 per share, and selling one VIR July 15 put option at $ 35 per share at a premium of $ 7.1 (each call) and $ 9.75 respectively, thus having an initial cash inflow of $ 23.95.

Market Price

Cash Inflow from two $ 35Call

Cash Inflow from $ 35 Put

Initial Cash inflow

Net Cash Flow

25.0

0

-10.0

23.95

13.95

27.5

0

-7.5

23.95

16.45

30.0

0

-5.0

23.95

18.95

32.5

0

-2.5

23.95

21.45

35.0

0

0

23.95

23.95

37.5

-5.0

0

23.95

18.95

40.0

-10.0

0

23.95

13.95

42.5

-15.0

0

23.95

8.95

45.0

-20.0

0

23.95

3.95

47.5

-25.0

0

23.95

-1.05

50.0

-30.0

0

23.95

-6.05

Vertical Bullish spread:

Buying a call option at lower strike price and selling another call option at higher strike price at the same expiration date. Here, the person is expecting the price to go up.

Eg buying one VIR July 15 call at $ 42.5 per share, and selling one VIR July 15 call option at $ 52.5 per share at a premium of $ 4.4 and $ 3.31 respectively, thus having an initial cash inflow of – $ 1.09.

Market Price

Cash Inflow from $ 42.5 Call

Cash Inflow from $ 52.5 Call

Initial Cash inflow

Net Cash Flow

35.0

0

0

-1.09

-1.09

37.5

0

0

-1.09

-1.09

40.0

0

0

-1.09

-1.09

42.5

0

0

-1.09

-1.09

45.0

2.5

0

-1.09

1.41

47.5

5.0

0

-1.09

3.91

50.0

7.5

0

-1.09

6.41

52.5

10.0

0

-1.09

8.91

55.0

12.5

-2.5

-1.09

8.91

57.5

15.0

-5.0

-1.09

8.91

60.0

17.5

-7.5

-1.09

8.91

Vertical Bearish spread:

Buying a call option at a higher strike price and selling another call option at a lower strike price at the same expiration date. Here, the person is expecting the price to go down.

Eg selling one VIR July 15 call at $ 37.5 per share, and buying one VIR July 15 call option at $ 47.5 per share at a premium of $ 6.07 and $ 3.8 respectively, thus having an initial cash inflow of $ 2.27.

Market Price

Cash Inflow from $ 37.5 Call

Cash Inflow from $ 47.5 Call

Initial Cash Inflow

Net Cash Flow

25.0

0

0

2.27

2.27

27.5

0

0

2.27

2.27

30.0

0

0

2.27

2.27

32.5

0

0

2.27

2.27

35.0

0

0

2.27

2.27

37.5

0

0

2.27

2.27

40.0

-2.5

0

2.27

-0.23

42.5

-5.0

0

2.27

-2.73

45.0

-7.5

0

2.27

-5.23

47.5

-10.0

0

2.27

-7.73

50.0

-12.5

2.5

2.27

-7.73



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