Inovio Pharmaceuticals (NASDAQ:INO) may just end up saving the world from the novel coronavirus. But before investors buy into a promising vaccine and encouraging price chart, a position in INO stock should be immunized against undesirable binary risk using Inovio’s options market.
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When it comes to small-cap biotech stocks with little in the way of existing revenues and a lot in the way of red ink, there are no guarantees of longer-term survivorship. When changing those fundamentals hinges on a breakthrough treatment for Covid-19, there’s obviously a lot riding on that outcome, for better or worse.
Since the beginning of 2020 and when Covid was barely more than a passing story outside of Asia, shares of INO rocketed from just under $3 to as high as $33.79. In a perfect world, it’s enough for investors to have captured returns in excess of 1,000%. It’s mind-boggling. The result has also proven very elusive.
In our estimation, to have stomached Inovio’s stock volatility during its run up would have been an impressive feat. The fact is those massive returns were marked by extreme volatility over the course of a handful of months leading into the second half of the calendar year. Those gains were also incredibly short-lived. Less than four trading sessions also took away a full 50% of Inovio’s impressive rally.
But there may yet be a second chance for a few lucky investors to realize capital gains approaching or exceeding Inovio’s captivating high-water mark. New buyers of INO also stand to realize a handsome profit, but risk-adjusted returns are where investors should be focused.
Clinical Trials and Competition
To be clear, the company’s Phase 1 clinical trial results for INO-4800 have been impressive. But a successful Phase 1 is simply a good start. A drug which goes on to become a successful treatment is still a very large question mark. Time is critical for Inovio as finding a coronavirus vaccine is an arms race.
One of the companies gaining credible attention is drug giant Pfizer (NYSE:PFE). The company has partnered with German-based BioNTech SE (NASDAQ:BNTX) and early-stage study results look good. What’s more, the pair have a total of four Covid-19 vaccine candidates they’re working on.
INO Stock Weekly Price Chart
Source: Charts by TradingView
There’s hope yet, right? There is. While Inovio’s recent plunge cut the stock’s market cap in half, shares also put together a fairly healthy-looking technical low on the price chart. And now the corrective activity could be worth buying into.
Inovio’s July 1 bottoming candlestick challenged its relative high established in March when the coronavirus first impacted the U.S. It’s potentially bullish. The correction also marked a test of a pair of key Fibonacci levels tied to the stock’s yearly low and its last significant pivot within its uptrend set back in June. The basis for a meaningful bottom looks good, but actual price confirmation for a low was missing until today.
Entering a new trading week shares are just moving above an inside decision-style candlestick formed in the aftermath of Inovio’s corrective move. Coupled with the recent technical testing and ability to maintain its Covid-driven uptrend, a trade-through in stock price is generally a solid signal to go long. On the other hand, an ‘iffy’ weekly stochastics setup, heady volatilit,y and with the reality of bearish binary event risk, my suggestion is to purchase an out-of-the-money bull call spread.
A bull call vertical leverages returns for investors if INO stock can, as anticipated, trade higher. Given a bit of price momentum this strategy can easily dwarf a stock trader’s profits over the same rally.
Maybe more important, the other bottom-line is the strategy’s unmatched defensive characteristics. While we can hope for the best, the defined and reduced exposure offered by this spread type would be incredibly welcome should competition or Inovio’s drug become more problematic than what played out earlier this month.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.