Update on CRBP Credit Spreads after stock falls more than 70%

Corbus Pharmaceuticals (NASDAQ:CRBP) dropped more than 70% on September 8, 2020, in reaction to an unsuccessful Phase 3 clinical trialRESOLVE-1, evaluating lead drug lenabasum in patients with a rare autoimmune disorder called diffuse cutaneous systemic sclerosis.

As we are holding 2 credit spreads on CRBP stock, we decided to update our action plan. We are holding September 18 (6/5), and October 16 (5/4) expiry credit spreads

We sold these spreads when the stock price for CRBP was around $8.80 - $9.0 per share. now with the stock price dropped to $2.20 at the first sight it might look like we are in trouble.

CRBP stock price after market close on September 8, 2020

The good news is - as we were selling credit spreads we are protected now, much more protected than if we were selling naked or cash-secured puts.

This is the biggest pros of selling credit spreads - you minimize your risk, as we were selling $1 wide spreads, our max risk on the spread is $1 or $100 (minus the premium received)

We could close the spreads with a loss (the loss would be $113 if we decided to close both spreads), but we have decided to:

  • get assigned September 18 put option with a strike price $6

  • exercise September 18 put option with a strike price $5 and collect about $282 from this bought put option.

Basically this means we are going to pay $600 for stock now worth just $220, but we will also get paid an additional $282. Our real buying price will be then $318 or $3.18 per share

Additionally, we will

  • Sell monthly covered call with the strike price $3, $4,$5, or $6 (we believe our break-even strike prices could be constructed around $3) to collect an additional premium

  • We will wait more time with our October 16 credit spread, maybe the price will bounce back, who knows.

Anyhow, we feel quite protected and safe when selling credit spreads.