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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Friday, July 23, 2021

Playing the Moderna Over Valuation

By Century Financial in Investment Insights

Playing the Moderna Over Valuation
Playing the Moderna Over Valuation

*Trading in financial markets carries risk and can result in loss of capital
*This performance is only observed with historical backtests and not traded by the company

The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions

The 2 structures are based on options buying & selling strategy.
Option prices and the corresponding pay-off are as of expiry & for representative purposes only. Going ahead, as the stock price moves in either direction, final pay-off will change accordingly.
The assumption of receipt of initial coupon or the initial debit cost is based on the option premiums available at the time of structure creation. This may vary at the time of actual execution depending on the corresponding option prices and implied volatility.
Numbers given below for the P & L are on a gross basis (without considering any transaction charges.)

Rationale Moderna share prices are on a roll with the stock gaining by 50 % over the last 10 day period.On YTD basis, the stock is up by 220%. The company's pioneering m-RNA technique has potential to treat broad spectrum of diseases many of which cannot be addressed by the current therapies. The company is currently valued at almost half of Pfizer's market cap.
Reason for the current spike in Moderna share prices On June 25 2021, the FDA revised the patient and provider fact sheets regarding the suggested increased risks of myocarditis and pericarditis ) following vaccination. The emergency use authorization allows the Moderna COVID-19 Vaccine to be distributed in the U.S for use in individuals 18 years of age and older. This has hugely boosted the prospects of the vaccine maker with more nations scrambling to get supply agreements from the company. Inclusion of Moderna shares in the SPX 500 benchmark index has further contributed to the current spike.
Is the current rally justifiabale? The market debate is running hot over the same. A look at the company's fundamentals suggest the stock running ahead of itself. Moderna is expected to clock in roughly $ 20 billion worth of sales this year from its landmark vaccine product as well as slate of other products in pipeline that are based on the m-RNA technology. Moderna's market cap is currently at $ 140 billion, 60 % of Pfizer's current market cap of $ 233 billion. Moderna with its trailing 12 M PE of 279 hugely outpaces Pfizer trailing 12 M PE of 17. The company's earning are expected early next month with focus now shifting more towards its vaccine supply. Though Moderna suggested that 2022 Covid-19 vaccine orders could exceed those of 2021, a consensus range of $8-$27 billion indicates that different views do persist, especially given uncertainty over the need for or even the timing of one time booster doses and use in younger age groups.
How to target the current overvaluation? In a scenario, where the stock is simply sold short to gain from any downside, the corresponding losses can be huge should the stock again rally from here on. Client may consider trading with the Put Ratio Backspread Options to keep the downside potential gains unlimited and upside risk limited. The 2 versions of the spread primarily differ based on the lower side put strikes selection. In both the cases, the gains towards downside are incremental in nature.
Trend Expectations Bearish ( below $ 270 range) with high volatility.
Max Loss Occurance Should the stock stay rangebound between $ 260 - $ 320, there is a possibility of max loss.
In a worst case, should the stock rally more, what would be the worst case losses? With Version 1, the structure is designed to be a potentially net credit one. This ensures that even in an scenario where the stock prices rally, the premium stays. With Version 2, should the stock prices rally, the potential max loss is capped at - $ 400.
Moderna v/s Pfizer Comparison

Moderna Pfizer
Last Price $348.00 $41.68
Market Cap (Billions) 139.12 233.7
TTM PE 277.83 16.96
TTM EPS 1.25 2.46
Q1'2021 Revenue (Billions) $1.90 $14.60
2021 Expected Revenue (Billions) $19.00 $74.00

Sr. No. Structure Underlying Expiry Last Price Exposure Structure Price Range Considered Lower Put Strike (2 * Buy) Upper Put Strike (1 * Sell) Net Premium Paid Net Premium Received Break even Points Potential Max Profit Potential Max Loss
1 Moderna Over Valuation Capture - V1 $ MRNA 17th September, 2021 $348 1 Lot = 100 Shares $ 150 - $ 510 86% 98% - $ 2 (0.57%) Below $ 262 & Above $ 338 $11,200 $(3,800)
2 Moderna Over Valuation Capture - V2 $ MRNA 17th September, 2021 $348 1 Lot = 100 Shares $ 150 - $ 510 89% 98% $4.6 (1.3%) - Below $ 275.4 $12,540 $(3,460)

Structures Comparison with Moderna Normal Short & Hold

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Date: 27/07/2021

Arun Leslie John
Chief Market Analyst

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