MannKind Earnings: 2 Trades for a MNKD Stock Rally

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Trading options ahead of an earnings event is always speculative, but with biopharmaceutical firm MannKind (MNKD), it could be doubly so. The company is slated to release its second-quarter earnings report ahead of the open on Tuesday, but if speculation plays out, MNKD stock traders won’t be talking about MannKind earnings, the expected loss of 8 cents per share or the $250 million in revenue that Wall Street is looking for.

They will likely be talking about Afrezza — the only inhalable insulin treatment on the market — and MannKind’s guidance.

In the five months since receiving FDA approval, Afrezza has recorded total sales of only about $3.3 million — far short of investor expectations, and making expected annual sales of $2 billion seem like a pipe dream. Yet, despite these low sales figures, MannKind announced that it had tripled its Afrezza production capacity.

One likely reason for the increased production are expectations for approval from the European Medicines Agency. With the FDA already giving Afrezza the green light, and the FDA being among the most stringent in terms of approval, it seems like a no-brainer that the EMA would also approve the drug. According to the World Health Organization, there are more than 60 million diabetics in Europe, increasing Afrezza’s potential market base exponentially.

But while stockholders could likely overlook weak initial sales figures (Afrezza has only just completed its first full quarter of sales), MannKind’s recent debt restructuring plans turned investors off big-time. The company plans to issue $56.9 million in common shares to help pay off its 2015 notes, as well as issuing new convertible debt due in 2018. With CFO Matt Pfeffer stating that there would be no second offering on MNKD shares, stockholders faced with share dilution were incensed over the deal.

MNKD 8-7-2015
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Which brings us to the current sentiment and technical outlook for MNKD. Following a roughly 25% plunge in July, MannKind stock is currently trading in oversold territory. The shares are attempting to build support in the $4 region, while facing declining resistance at their 10-day and 20-day moving averages.

Furthermore, investor sentiment is extremely bearish on MNKD. Five of the eight analysts covering the stock rate it a “hold” or worse, according to data from Thomson/First Call, and as of the most recent reporting period, a whopping 112.8 million shares, or 42.8% of MNKD’s total float, are currently sold short.

With so much negativity levied against the shares, there is a wealth of sideline money just waiting to be brought to bear on MannKind stock — and, judging from short-term options activity, short sellers are beginning to sweat. Specifically, the weekly Aug 14 series put/call open interest ratio has plunged to a reading of 0.25, with calls quintupling puts among options set to expire at the end of next week (i.e., those that will be most affected by MannKind earnings).

Overall, weekly Aug 14 series implieds are pricing in a potential post-earnings move of about 10% for MNKD. This places the upper bound at $4.68, while the lower bound lies at $3.82. Given the excessive pessimism levied against the shares, and the potential for a significant announcement and/or guidance regarding Afrezza, implieds may be understating the potential move.

2 Trades for MNKD Stock

Call Spread: For those speculators looking to bet bullish on MNKD ahead of earnings, the Aug $4/$5 bull call spread was offered at 30 cents, or $30 per pair of contracts, at the close of trading on Thursday. Breakeven lies at $4.30, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if MNKD closes at or above $5 when August options expire.

If you’re feeling a bit more speculative, drop the sold Aug $5 call to remove any potential cap on profits for the trade … just bear in mind this also raises the breakeven to $4.39.

Put Sell: For those not looking to go all in on the bullish bandwagon, a weekly Aug 14 series $3.50 put sell may be what you are looking for. After the close on Thursday, the weekly Aug $3.50 put was bid at 14 cents, or $14 per contract.

On the upside, you keep the premium received as long as MNKD stock closes above $3.50 when August options expire at the end of this week. On the downside, should MNKD trade below the sold strike ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $3.50 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/mannkind-earnings-2-trades-for-a-mnkd-stock-rally/.

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