Get Ready to Scale the Summit
A solid covered call trade around a promising oncology name.
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One of the newer positions in my portfolio is Miami-based biopharmaceutical company Summit Therapeutics SMMT. I would not mind holding this name with straight equity. However, given the options are both liquid and lucrative and the fact there is likely to be a news vacuum around the company’s developmental pipeline for many months, the more prudent way to go with this stock, in my view, is utilizing a simple covered call strategy.
Summit Therapeutics has recently seen renewed enthusiasm on its prospects from the analyst firm community. Over the past six weeks JMP Securities ($32 price target), Jefferies ($31 price target) and Wells Fargo ($30 price target) have initiated the stock with new "Buy" or "Outperform" ratings.
Summit's stock currently trades at just under $18 a share after pulling back in recent months. To be fair, the equity had enjoyed a massive rally from late May to mid-September after the company's primary asset, ivonescimab, which is a bispecific antibody, posted encouraging late-stage trial results.
Data showed that ivonescimab demonstrated superiority to Merck's MRK blockbuster Keytruda in a late-stage trial evaluated it to treat non-small cell lung cancer, or NSCLC. It was the first time in a late-stage randomized trial for NSCLC that a candidate had outperformed the best-selling drug in the world. That said, the study was conducted by Summit’s Chinese partner Akeso AKESF and the trial took place in the Middle Kingdom.
Of note, ivonescimab is targeting both PD-1 and VEGF. This could potentially expand the PD-1 inhibitor market. Keytruda inhibits PD-1 alone. BioNTech BNTX and Instil Bio TIL are two other names pursuing this developmental approach.
As additional background, the common PD-1 target is also known as programmed cell death protein 1. VEGF stands for vascular endothelial growth factor. Ivonescimab binds to both targets simultaneously, which in theory could lead to greater tumor suppression. This could lead the candidate to better efficacy than Keytruda that targets PD-1 alone, as previously noted. Data from the China trial did show improved progression free survival, or PFS,compared to Keytruda.
The proof will be in the pudding obviously. Towards that end Summit recently completed the enrollment in a late-stage and pivotal trial in the United States and also garnered fast-track authorization from the FDA for this indication. While full results are not scheduled to be fully available until the summer of 2027, key top-line results should be disclosed sometime by the summer of next year.
Positive data could very well make Summit a prime buyout target for a Big Pharma concern looking to expand its footprint in oncology. Management smartly used the recent spike in the share price to conduct a secondary offering to address its near-term funding needs.
As importantly, the calendar gives me a way to target Summit with a covered call strategy using option strikes that expire in April. If the stock holds its ground or moves higher, I "scalp" a nice option premium. If they fall below my strike price closer to expiration, I can "roll" my position forward picking up another lucrative option premium.
Option Strategy
This is how one can initiate a holding in SMMT with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the April $17 call strikes, fashion a covered call order with a net debit in the $13.80 to $14.00 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 22% with near identical upside potential even if this equity falls some over the five-month option duration.
At the time of publication, Bret Jensen was long SMMT.
