Corbus Pharmaceuticals (NASDAQ:CRBP) dropped more than 70% on September 8, 2020, in reaction to an unsuccessful Phase 3 clinical trial, RESOLVE-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.