Novo Nordisk weight loss drug

[ChpBstrd]

Talk me out of buying long-duration call options on this company:

Pharma company Novo Nordisk announced the results of phase 3 trials for their diabetes drug, Semaglutide, to be used at higher doses as a treatment for obesity:

For 68 weeks, participants injected themselves weekly with either semaglutide or a placebo. On average, over half of those who received the drug itself lost nearly 15% of their body weight, and over a third achieved a weight loss of at least 20% of their weight.

And the drug is now FDA-approved. It goes on sale this month.

https://abcnews.go.com/Health/newly-approved-drug-heralded-game-changer-growing-national/story?id=78065574&cid=clicksource_4380645_1_heads_hero_live_headlines_hed

The drug is expected to have a starting cost around $1,350 per 30-day supply, and it must be taken for life or the weight will come back. NVO are in talks with insurance companies to provide coverage for the drug, which obviously has an actuarial rationale. In other words, this could be the next Viagra, except targeted to a much bigger audience. 

Currently, 42.4% of all adults in the U.S. suffer from obesity, defined as having a body mass index at or above 30, according to the Centers for Disease Control and Prevention.

Recall that Pfizer almost doubled in 1998, after Viagra went on sale to fix a problem experienced by 10% of men worldwide, and 22% of men in the U.S.

Currently, NVO has an ROE of 76% a profit margin of almost 34%, a forward PE of ~25 compared to ~21 for the S&P500, and a beta of 0.31 despite having gained 25% in the past year and 64% in the past two. Revenue, earnings, and operating cash flow have shown steady growth over the years, even in 2020. All this is at reasonable/conservative levels of debt leverage. The company dipped much less than the S&P 500 in March/April 2020. NVO closed at $80.95 today. Call options expiring December 17, 2021 at the $85 strike could be had for about $2.80 today.

Please talk me out of taking a small speculative position with 2% of my portfolio. E.g. Make the case that this drug's potential is priced in, rather than just their ~6%/year earnings growth.

[ixtap]

I lost tons of weight on a semaglutide for diabetes, as I could barely keep anything down and I was constantly burping.

[MustacheAndaHalf]

Talk me out of buying long-duration call options on this company:
...
Recall that Pfizer almost doubled in 1998, after Viagra went on sale to fix a problem experienced by 10% of men worldwide, and 22% of men in the U.S.
...
Please talk me out of taking a small speculative position with 2% of my portfolio. E.g. Make the case that this drug's potential is priced in, rather than just their ~6%/year earnings growth.

Obesity is not diabetes.  You mentioned an expensive ($16k/year, higher than the Federal minimum wage) drug that treats diabetes.  You need to look at diabetes patients, not people who are overweight.

Pfizer also almost doubled in 1997, the year before that announcement.  Did you see what that stock did when they were the first company to produce a highly effective vaccine for a global pandemic?  The stock spiked, then dropped.  Would you buy $40 call options on Pfizer stock now?

Doctors have to trust it works, and then the cost has to be borne by someone - typically insurance companies.  Have any insurance companies agreed to cover this drug?  For how many years?

It looks like NVO stock has already received a nice bump from the news, going up $30 billion in market cap.  Do you know something that is not priced in?

[Metalcat]

You could do it, but don't kid yourself that it's not a gamble.

As someone in the medical world, A LOT of very promising drug uses go nowhere, the side effects are too brutal, or the efficacy doesn't increase with dose, etc, etc.

That doesn't mean there isn't potential money to be made here, but there's an entire world of expert Pharm investors already analyzing this to death way ahead of you.

Nothing you have presented shows any special or predictable insight into how the company will perform moving forward.

If you want to gamble with 2% of your portfolio, go ahead.

But speaking as a former research scientist who worked at one point in an obesity lab, I'm not jumping out of my seat to invest in this. It could be a game changer or it could be a dead end.

Don't forget, Olestra actually works, it's just that no one uses it because they would rather be obese than live with greasy anal leakage.

[cool7hand]

Viagra is far from an apples to apples comparison. As I understand it, Viagra works with few meaningful side effects for the general public. For many, there are also few alternatives that works as well as Viagra. Semaglutide works by interfering with the body's ability to metabolize carbs, which includes some pretty significant side effects. Ixtap apparently experienced those side effects. And, there are alternatives to Semaglutide: e.g., many people can put type-2 into remission with lifestyle changes. (https://chriskresser.com/pills-or-paleo-preventing-and-reversing-type-2-diabetes/)

Be careful.

[ChpBstrd]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

[cool7hand]

I don't believe in luck, but I do hope that it goes your way!

[MustacheAndaHalf]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

That checks out: this past Tuesday, 2 contracts of NVO at $60 strike expiring 2023-Jan were bought for $24.50/sh, or $4900 total.  8.34% of $4900 is $5308.66, which matches your $409 profit ($408.66).

You took the midpoint of the bid/ask price, which is currently:
$24.30 bid and $28.90 ask averages $26.60, or 8.57% profit, also checks out
(the market moves, so it doesn't match exactly)

But is taking the midpoint realistic?  Only 7 of those contracts have ever been sold, including the 2 you bought.  You own 30% of the market in these calls.  I think it's safe to call these low volume, which means very few buyers or sellers.  I very much doubt you can sell for the midpoint price.

Another example of this is the low bid: the stock is $84.76, but the low bid on the $60 strike is $24.  They expect a free lunch, to pay $84 for something worth $84.76, so it's not a serious bid.  That's another sign of a low volume market.

The stock keeps moving up each day, so you've definitely made a profit.  But I wouldn't count it as the midpoint of a very low volume market with an unrealistic bid price.

[ChpBstrd]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

That checks out: this past Tuesday, 2 contracts of NVO at $60 strike expiring 2023-Jan were bought for $24.50/sh, or $4900 total.  8.34% of $4900 is $5308.66, which matches your $409 profit ($408.66).

You took the midpoint of the bid/ask price, which is currently:
$24.30 bid and $28.90 ask averages $26.60, or 8.57% profit, also checks out
(the market moves, so it doesn't match exactly)

But is taking the midpoint realistic?  Only 7 of those contracts have ever been sold, including the 2 you bought.  You own 30% of the market in these calls.  I think it's safe to call these low volume, which means very few buyers or sellers.  I very much doubt you can sell for the midpoint price.

Another example of this is the low bid: the stock is $84.76, but the low bid on the $60 strike is $24.  They expect a free lunch, to pay $84 for something worth $84.76, so it's not a serious bid.  That's another sign of a low volume market.

The stock keeps moving up each day, so you've definitely made a profit.  But I wouldn't count it as the midpoint of a very low volume market with an unrealistic bid price.

I'm almost a monopolist on that one option! WOOHOOHOO HAHA!

Trades can be expected to execute at some midpoint. That gap between the bid and the ask is the point where all the trades that could exist in that space would have already executed or have already executed, so all we see are the offers that have not yet executed. That empty middle gets cleared out immediately. When you enter the execution zone, you get execution.

That said, yes, illiquid options often have "stink bids" for the bid, the ask, or both and these are aimed at picking off profits from traders in a bind or the occasional ameteur. It's not necessarily true that the midpoint of these stink bids represents the correct price as calculated by Black-Scholes or other options pricing models.

[MustacheAndaHalf]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

...
You took the midpoint of the bid/ask price, which is currently:
$24.30 bid and $28.90 ask averages $26.60, or 8.57% profit, also checks out
(the market moves, so it doesn't match exactly)

Trades can be expected to execute at some midpoint. That gap between the bid and the ask is the point where all the trades that could exist in that space would have already executed or have already executed, so all we see are the offers that have not yet executed. That empty middle gets cleared out immediately. When you enter the execution zone, you get execution.

That said, yes, illiquid options often have "stink bids" for the bid, the ask, or both and these are aimed at picking off profits from traders in a bind or the occasional ameteur. It's not necessarily true that the midpoint of these stink bids represents the correct price as calculated by Black-Scholes or other options pricing models.

How did you calculate the price?  Your price estimate almost exactly matched by calculation of (bid+ask)/2, which includes stink bids.

If you're claiming the gap between the bid and ask is an "empty middle" that "gets cleared out immediately"... I strongly disagree, or misunderstood you.

What is the zone where you expect orders to immediately execute for the call option you bought?  Also worth noting: trading volume averaged 1.5 million shares per day this week, compared to 0.5 million per day last week.  You bought call options during a week of high volume (driven by the FDA announcement).  When you go to sell, the volume will likely be lower - meaning fewer buyers of call options.

[ChpBstrd]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

...
You took the midpoint of the bid/ask price, which is currently:
$24.30 bid and $28.90 ask averages $26.60, or 8.57% profit, also checks out
(the market moves, so it doesn't match exactly)

Trades can be expected to execute at some midpoint. That gap between the bid and the ask is the point where all the trades that could exist in that space would have already executed or have already executed, so all we see are the offers that have not yet executed. That empty middle gets cleared out immediately. When you enter the execution zone, you get execution.

That said, yes, illiquid options often have "stink bids" for the bid, the ask, or both and these are aimed at picking off profits from traders in a bind or the occasional ameteur. It's not necessarily true that the midpoint of these stink bids represents the correct price as calculated by Black-Scholes or other options pricing models.

How did you calculate the price?  Your price estimate almost exactly matched by calculation of (bid+ask)/2, which includes stink bids.

If you're claiming the gap between the bid and ask is an "empty middle" that "gets cleared out immediately"... I strongly disagree, or misunderstood you.

What is the zone where you expect orders to immediately execute for the call option you bought?  Also worth noting: trading volume averaged 1.5 million shares per day this week, compared to 0.5 million per day last week.  You bought call options during a week of high volume (driven by the FDA announcement).  When you go to sell, the volume will likely be lower - meaning fewer buyers of call options.

IIRC, the bid/ask spread was only a few tens of cents at the time I placed my order so I wasn't worried about being dragged into a far-out price by a stink bid. Also, my broker lists the calculated "theo price" in my feed, so that's a sanity check FWIW. I placed my bid a couple of minutes before the market closed.

Another insight / caveat: Although the bid/ask in a thinly-traded option might stay the same for hours, counterparties' willingness to transact at the middle actually waxes and wanes as the stock price zig zags throughout the day. They're more likely to buy your call at your ask price as the stock zooms up, and they're more likely to sell you a call at your bid price during a dip. I suspect my order executed on a tiny dip in the stock price that occurred a few minutes after it was submitted. Such dips might make an instantaneously calculated theoretical price a penny or two lower than my bid, and there are fast computers out there arbitraging such orders. There's a strategic case to be made for submitting a bid slightly below or an ask slightly above the midpoint or current theoretical price. Because zig-zags are inevitable, it's likely one will get their price filled at some point during the day, although this is a tradeoff because of the risk of not getting executed on what would otherwise have been a profitable order.

[bwall]

Y'all failed to convince me. My Jan 20, 2023 long call options at the 60 strike are up 8.34% or $409 so far. Wish me continued luck!

AARRGG ! ! !  If only I'd seen the post in time, I could've convinced you not to do it! ! ! ! ! 

Here's my take:

1) Congratulations on the winning trade (so far). You're up and that's always a great place to be on a trade.

2) The easy money has already been made.

3) The time to gamble on new drugs is when they're still in the pipeline, before Phase II is finished. Once they complete Phase II, the stock will react according to the results. Phase III is generally a snoozer, just a repeat of Phase II. But, it's not over until it's over, so the final 'easy' bump will be after the FDA approval. The FDA approval can take much longer after Phase III completion than anyone thinks is necessary, so it's not to be discounted.

Since NVO has already gotten FDA approval, I'm kinda with Malcat on this. It's not a sure thing and the stock has already gotten it's FDA approval bounce. 

4) What else does NVO have in it's pipeline? There might be something of interest there that could move the stock. Which, by the way, leads to

5) It's already a huge company, market cap of $140 billion. So, it's going to take a lot to move the needle on that stock.

6) Let us know how the trade pans out for you. Inquiring minds want to know.

[ChpBstrd]

Now up about 16%.

[bwall]

Now up about 16%.

Is the stock up 16% or your trade?

Congrats either way!

[ChpBstrd]

Now up about 16%.

Is the stock up 16% or your trade?

Congrats either way!

The call options.

[ChpBstrd]

Now up about 16%.

Up 22.4%, or $1098.
Submitted a sell order at $35. The options are currently at $30 but I’m confident it’ll hit 35. I might have HODL’d if I wasn’t buying on margin!

[bwall]

Now up about 16%.

Up 22.4%, or $1098.
Submitted a sell order at $35. The options are currently at $30 but I’m confident it’ll hit 35. I might have HODL’d if I wasn’t buying on margin!

Congratulations!

A quick trade is the smart trade, IMO, when working with margin. Get in and get out. No need to push the envelope when you're using someone else's money.

[ChpBstrd]

Now up about 16%.

Up 22.4%, or $1098.
Submitted a sell order at $35. The options are currently at $30 but I’m confident it’ll hit 35. I might have HODL’d if I wasn’t buying on margin!

Up 32.6%, or $1599.
The option is at around 32.50 and my sell order at 35 is the new ask price.

[cool7hand]

Very cool. Happy for you!

[ChpBstrd]

Now up about 16%.

Up 22.4%, or $1098.
Submitted a sell order at $35. The options are currently at $30 but I’m confident it’ll hit 35. I might have HODL’d if I wasn’t buying on margin!

Up 32.6%, or $1599.
The option is at around 32.50 and my sell order at 35 is the new ask price.

Sold at $35 for a profit of $2097.31 minus $67.66 in margin interest for a return of 41.4% since 6/8.

[ChpBstrd]

Now up about 16%.

Up 22.4%, or $1098.
Submitted a sell order at $35. The options are currently at $30 but I’m confident it’ll hit 35. I might have HODL’d if I wasn’t buying on margin!

Up 32.6%, or $1599.
The option is at around 32.50 and my sell order at 35 is the new ask price.

Sold at $35 for a profit of $2097.31 minus $67.66 in margin interest for a return of 41.4% since 6/8.

Sold too soon! Now that option is worth about $41.65.