1. Commentary
2. Dendreon’s Big Day
3. Marvel Entertainment is Marvelous
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts
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1. Commentary
It was another whacky week for the market and in the end; the bulls got what they wanted. Once again, the bears started off the week by scaring off the wanna-be bulls and driving the Dow down 300 points on Monday. That day, the Dow finished at 7,841.
That was the first floor of support I had talked about in last week’s Weekly Wrap and then I mentioned 7,600. On Tuesday, we hit a low of 7,699 and that was where the bulls stepped-in. Once we got back over 8,000 (that day), it confirmed this area of support.
However, we didn’t get any significant rally either so it was pretty much a draw between the two sides. The Dow had its 6-week winning streak snapped as it fell 55 points to close at 8,076 while the S&P 500 slipped 3 points and closed at 866. Meanwhile, the Nasdaq actually gained 1.3%, or 21 points, to close at 1,694.
Financial stocks started to rally again on Friday after the preliminary results from the Treasury’s stress test was released. Basically it said the banks had enough cash needed to be “well capitalized”. There weren’t any other specifics really and there were no banks that were named on who may have failed the stress test. The sector was looking weak going into 2pm but the news helped the sector rally sharply. Check at the charts on Friday for 4 or 5 financial stocks and you will see how they bounced. Easy money if you played it for an hour or so.
Earnings played a roll in moving the markets with many companies turning in a report card that was average. The common theme was that most firms beat earnings, but sales and outlooks were cautious or weak. Of course, beating an already lowered bar for earnings wasn’t the problem it was the fact that most companies beat earnings by aggressive cost-cutting.
However, there are hints that “things” are improving but the numbers were baked in the cake and the market had nothing to rally on. We did get the pop in financials which really fueled the rally and the next catalyst on that front is May 4th.
We still have a busy week with earnings and there will be a few economic reports to watch out for but I see another choppy week as we head into May.
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2. Dendreon’s Big Day
This is Dendreon (DNDN, $20.08, down $0.25) week and although we are following a few other trades, this has been “The Week” we have all been waiting for. For those of you who are reading the Weekly Wrap for the first time, I mentioned the stock back on March 19th when it was at $4.
Here are a few highlights from that blog:
“Investing in Biotech stocks can be an exciting, yet, risky investment. Investing in Biotech options takes that same risk/ reward to another level. Assessing how these stocks react to certain news concerning FDA approvals and clinical trials is an art in itself and requires specialized knowledge. However, once you learn the process, there are times where the profits you can make off one trade will be more than most people make in a year.” —
“The homework is essential because options traders live for these types of trades because if you own the right call or put options they can make you as much as 500%-800% on the news. That was not a typo.” —
“Dendreon (DNDN, $4.29 on 3/19/09) has been making headlines lately after reporting better-than-expected earnings but Wall Street is eagerly awaiting the outcome on one of its cancer drugs, Provenge. This is Dendreon’s crown jewel and it targets Prostate cancer which is the second most common cancer affecting men in the U.S. and one of the leading causes of cancer-related death.” —
“Two years ago volume approached 93 million shares that Friday which was more than the 76 million shares the company had outstanding at the time.” —
“The 52-week high for Dendreon is $10 and I would expect that we go higher than that if the drug is approved. This is a high risk trade with the chance of either hitting it big or losing much of the capital you put up if the drug is NOT approved.” –
Those clues are what we are watching for on Tuesday.
One month and one week later, here we are. The move from $4 to $20 was a windfall for many of you and thanks for taking the time to email me your fantastic returns. How good were the returns?
Here were the calls options quotes from March 19th:
May 5 call (UKOEA, $2.22, up $0.22) Bid: $2, Ask: $2.22
May 7.5 call (UKOEU, $1.66, up $0.09) Bid: $1.55, Ask: $1.70
May 10 call (UKOEB, $1.30, up $0.10) Bid: $1.25, Ask: $1.30
May 12.50 call (UKOEV, $1.00, up $0.01) Bid: $0.95, Ask: $1.07
May 20 call (UKOED, $0.50, up $0.05) Bid: $0.40, Ask: $0.50
Here are the quotes as of Friday, April 24th:
May 5 call (UKOEA, $15.10, down $0.10) Bid: $15.10, Ask: $15.20
May 7.5 call (UKOEU, $13.05, up $0.15) Bid: $12.75, Ask: $13.00
May 10 call (UKOEB, $10.70, unch.) Bid: $10.50, Ask: $10.80
May 12.50 call (UKOEV, $8.65, up $0.15) Bid: $8.40, Ask: $8.65
May 20 call (UKOED, $3.55, unch.) Bid: $3.55, Ask: $3.60
As you can see, those returns are 700%-800%. The April call options returned upwards of 2,500%.
I have painted this picture to perfection but I don’t mention these returns to stroke my ego. I mention them for protection. The May 20 calls traded as high as $7.30 and I advised many of you to take profits on at least half of your positions or close them out and roll them into the August calls which we are still holding. I also rolled into some higher May options but the point is you shouldn’t risk everything or all of your profits hoping the stock zooms to $50.
In options trading we have to manage our portfolio and adjust for the risks. The homerun trades we make like this one can still go higher but now that the news is out we also can’t be stupid.
For instance, I had one person email me and said they bought 2 of the April call options and spent $80. When the stock popped to $22, they sold and had $1,900 in their account. Now, if someone took all of their profits from this one trade and rolled it all into another and the news was negative come Tuesday, they could lose most of their investment if Dendreon tanks back below $5.
I honestly can’t tell you what happens from here or where the stock will trade this week but I can try. Of course, I have told you about the short interest (20% of the float) and have talked about the risks from here on out. I will try and outline what I think might happen but realize these are just “educated” guesses.
There will be a ton of coverage over the next few days and you will likely be able to catch it on many of the news channels or over the internet. The stock held $20 all week and its high was $20.94 while the low was $18.51 last Monday. I expect that to change this Monday as investors try to get in before the big announcement on Tuesday.
On Tuesday, I have a pretty good feeling the stock gets “halted”. Okay, what does that mean, right? A trading halt is when a stock cannot trade due to pending news or news that was released. There are other reasons that trading can be halted such as order imbalances, earthquakes, or terrorist’s attacks. This one is news related obviously.
Dendreon will make the results available for Provenge at the American Urological Association’s (AUA) conference shortly after 2pm (EST) so we could get halted before then or even all day. Trading will probably resume on Wednesday.
The key point here is this. And this is very important. From my understanding, during a halt, you can still cancel open orders AND options may still be exercised. Check with your broker but if the stock is halted and you are in a situation to where this benefits you, then you have options that might help you.
Dendreon was halted on April 13th right after the market closed and the next day is when we got the big jump from $7 to $22. The stock was also halted on October 6th, 2008 at 7am, before the market opened.
That day the stock opened at $5.20, hit a high of $10 and closed at $6.93. Volume was 35 million. On April 14th, we saw 65 million shares trade hands. This week I expect to hit 100 million when trading gets underway after the news.
I would love to see us get to $25 before the stock is halted. Then, hopefully, the news comes in way above the needed “22%” and we get a number in the high 30% range of low 40%’s. Remember, this drug has data that goes back six years so we could get some impressive verbiage when the news is released.
That may get the stock to $30 if we aren’t at $25 before the news. If the stock stays at $20 then I’m averaging a 50% pop. That is where my initial $30 target comes from but if the stock is at $25 before it is halted, then that gets us to $35-$37. The icing on the cake would be the short-squeeze that could kick in which could get really interesting as Dendreon bears throw in the flag or raise the white towel.
In any event, it will be a historical day. I have been mentioning protection and you could use the May 10 puts (OKOQB, $0.56, up $0.11) in case this has all been a smoke-and-mirror show by Dendreon.
If the news is negative and Provenge fails to live up to the hype, then these calls will soar if Dendreon heads back below double-digits. If the stock tumbles to $5 then these calls would be worth $5 or 10x the value they are at now.
I don’t think Dendreon will let us down but it is really, really…really cheap insurance. It reminds me of those flood insurance commercials where the lady cries “but I don’t even live near the water” as a flooded house is shown. I think there would also be a bevy of lawsuits filed with the SEC based on the CEO’s comments just a few weeks ago if this drug, Provenge, is not approved.
I don’t have insurance, yet, because I have been a Dendreon bull for nearly two years but that doesn’t mean I won’t pick up some on Monday. That homework from two years ago finally paid off again and there is nothing more gratifying then making an option trade that returns that much of a percentage.
I’ll be here all week providing updates in the blog and make sure you check for updates by going to: Blog.OptionsMentoring.com
Full Disclosure: I own Dendreon call options.
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3. Marvel Entertainment is Marvelous
On Thursday, I gave regular readers of the blog a sneak preview on a Marvel Entertainment (MVL, $28.40, up $0.46) trade. We all know Marvel and the company is doing some good things. This Friday, the release of Wolverine is due out and I have already checked…demand is strong. Opening weekend tickets are selling faster than a Jay Cutler jersey in Chicago and you can bet when numbers are released, this movie will easily be number one. I’m not sure if it duplicates the success of Iron Man but the buzz is enormous.
This play isn’t on the strength of Marvel’s balance sheet but on the momentum leading into next week. Analysts aren’t expecting a pop in numbers until 2010 as they have pegged a 50% drop in EPS (earnings per share) for 2009. However, Marvel will now launch the summer box office season for three years in a row, from 2010 through 2012 and there are a slew of blockbusters on the way, including Iron Man 2, SpiderMan 4, Thor, The First Avenger: Captain America and eventually, The Avengers.
The box office receipts will be in the billions for these films and don’t forget the licensing fees, their publishing division, and its move into animated television production. And their character library remains virtually untapped. That is the future and if I bought stocks, I would buy Marvel if I wanted to own it for the next 5-10 years.
I profiled the June 30 call options (MVLFF, $1.30, up $0.25) at $1.05 and I was looking for a 25%-50% return. The first part of that goal has already been met. I’m still like the trade but it is only a short-term trade. The company reports earnings on May 5th, which is Tuesday, the day after the box-office numbers are released.
I would like to be out of the trade before the earnings announcement and see the stock make a run to $30 this week or the day the numbers are released.
Stops are set at 50 cents for those of you who got in last week. If the calls trade lower, I like positions at original prices but confirm an uptrend before getting in.
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4. Earnings
Monday: Aaron Rents (AAN, $28.66, up $0.51), Baidu (BIDU, $217.54, up $5.04), Corning (GLW, $15.33, up $0.21), Emulex (ELX, $10.31, up $0.0.29), Energizer (ENR, $57.69, up $3.87), Humana (HUM, $27.36, down $0.10), Olin Corporation (OLN, $14.41, up $0.85), Plum Creek Timber (PCL, $36.35, up $1.59), PrePaid Legal (PPD, $33.17, up $0.75), Travelzoo (TZOO, $7.10, up $0.33), Valero Energy (VLO, $21.68, up $0.39) and Verizon (VZ, $31.00, unch.).
Tuesday: Advent Software (ADVS, $32.78, up $1.08), American Ecology (ECOL, $16.51, up $0.36), Bristol-Myers Squibb (BMY, $20.10, down $0.07), Buffalo Wild Wings (BWLD, $41.84, up $0.05), Carter’s (CRI, $22.46, up $0.62), Deutsche Bank (DB, $55.67, up $2.44), DreamWorks Animation (DWA, $18.84, up $0.47), E*TRADE Financial (ETFC, $2.48, down $0.06), Jacobs Engineering Group (JEC, $45.66, up $1.11), Lazard (LAZ, $32.23, up $1.25), Massey Energy (MEE, $13.64, up $0.76), optionsXpress Holdings (OXPS, $13.80, up $0.01), Panera Bread (PNRA, $63.75, up $1.30), Pfizer (PFE, $13.17, down $0.11), Trimble Navigation (TRMB, $19.55, up $0.37) and United States Steel (X, $29.03, up $2.00).
Wednesday: Aetna (AET, $23.96, down $0.14), Aflac (AFL, $28.62, down $0.04), Akamai Technologies (AKAM, $19.48, down $0.10), Baker Hughes (BHI, $35.46, up $1.88), Barrick Gold (ABX, $30.80, up $1.31), Citrix Systems (CTXS, $25.84, up $0.76), Digital River (DRIV, $34.42, up $0.94), Express Scripts (ESRX, $58.45, down $0.78), First Solar (FSLR, $147.46, up $3.96), General Dynamics (GD, $49.18, down $0.32), Jones Apparel Group (JNY, $7.47, up $0.58), NutriSystem (NTRI, $14.67, up $0.12), O’Reilly Automotive (ORLY, $37.72, down $0.74), Odyssey Healthcare (ODSY, $8.95, up $0.42), Qwest Communications (Q, $3.51, down $0.04), Starbucks (SBUX, $13.51, up $0.15), Time Warner Cable (TWC, $27.27, up $0.14) and Wyeth (WYE, $42.10, down $0.41).
Thursday: Ariba (ARBA, $9.21, up $0.15), Callaway Golf (ELY, $7.47, up $0.13), Camden Property Trust (CPT, $28.49, up $2.07), Celgene (CELG, $39.86, up $0.41), CIGNA, (CI, $19.58, up $0.01), Comcast (CMCSA, $13.89, up $0.28), Domino’s (DPZ, $8.38, up $0.46), Expedia (EXPE, $11.24, up $0.01), ExxonMobil (XOM, $66.57, up $0.86), Kellogg (K, $38.94, down $0.17), McAfee (MFE, $38.31, up $1.32), MetLife (MET, $29.25, up $1.05), Patriot Coal (PCX, $5.13, $0.50), Procter & Gamble (PG, $49.51, up $0.19), Safeway (SWY, $20.15, up $0.18), Starwood Hotels & Resorts (HOT, $20.82, up $0.88), Strayer Education (STRA, $181.97, up $9.21), Timberland (TBL, $15.03, up $0.18) and Viacom (VIA, $20.74, up $0.82).
Friday: Allergan (AGN, $47.08, up $0.27), Chevron (CVX, $66.60, up $1.07), Dean Foods (DF, $19.80, up $0.23), MasterCard (MA, $173.09, up $7.84), Simon Property Group (SPG, $50.65, up $2.24) and Washington Post (WPO, $422.00, up $5.30).
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5. Current Trades (Friday’s closing price)
Dendreon (DNDN, $20.08, down $0.25)
May 25 calls (UKOEE, $1.70, down $0.05)
Entry Price: $1.25 (4/17/09)
Exit Price: (open)
Return: 36%
August 10 calls (UKOHB, $10.75, down $0.25)
Entry Price: $2.20 (4/13/09)
Exit Price: $5.00 (open)
Return: 389%
There is not much more I can say about Dendreon that I haven’t already covered. I did spend a lot of time on their website over the weekend and can’t wait to see what the week holds. Think about some protection though. Even if you took a little of the profits from the first time around, it’s a good idea to have some just in case. Also, there would be nothing wrong in selling a little of the August position if you feel a tightness in the stomach.
Marvel Entertainment (MVL, $28.40, up $0.46)
June 30 calls (MVLFF, $1.30, up $0.25)
Entry Price: $1.05 (4/26/09)
Exit Price: $1.50
Return: 24%
ValueClick (VCLK, $9.90, up $0.15)
May 10 calls (QCSEB, $0.65, unch.)
Entry Price: $0.75 (4/9/09)
Exit Price: $1.50 (open)
Return: -13%
September 12.50 calls (QCSIV, $0.75, down $0.05)
Entry Price: $0.80 (4/9/09)
Exit Price: $1.60 (open)
Return: -6%
I’m starting to lose faith in this trade as the stock is really having trouble staying above $10. The company announces earning on May 5th and I was hoping to be out of the trade before then. Stops are set at half our entry prices.
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6. Monday Morning Playbook
I lot of attention will be on Dendreon over the next few days and one stock that could piggy-back the success of a Provenge approval could be Cougar Biotechnology (CGRB, $35.30, up $0.30).
The company is developing its own prostate cancer drug, Abiraterone, but the one thing that worries me is the lack of big volume. The average daily volume is only 100,000 while Dendreon averages 5 million and climbing.
I don’t know Cougar’s story at all because it is not a stock I actively follow. The shares have rallied though, from a low of $22 since the start of March and appears poised to make a run at its 52-week high of $40.
I’m not sold on the trade but I did notice there was 200 contracts of the May 40 calls (QBHEH, $0.55, unchanged) traded on Friday. The bid and ask on these calls is wide enough to drive a truck through making it another reason I don’t like the trade. The closing bid was 75 cents while the ask was $1.05. Even if you “split” the bid/ask and got in at 90 cents, you still get more bang for the buck with Dendreon.
Basically, I just wrote a bunch of hot air but hopefully you get a feel for how to analyze a trade. I thought I liked it when I was doing the research but there are too many other risks that I don’t like about Cougar.
I have been watching MasterCard (MA, $173.09, up $7.84) which reports earnings on Friday. The stock jumped nearly 5% before the weekend on the stress test news I had mentioned in the opening commentary. There was some action in the May 190 calls (MALER, $2.95, up $1.20) as they added 70% for the day. The calls opened at $1.95 and were trading at $1.70 before the 2pm news. That was the opportunity I was telling you about by playing the financials for a hour or so…
Mastercard jumped $20 the last time they reported earnings, rising from $140 to $160. The stock is trading at half its 52-week high of $320. I would love to get the May 190’s for under $2.25, maybe even $2, but that won’t happen unless the stock comes down a little.
If you can in for $2 and under, confirm an uptrend again before jumping in. Since it is an earnings play, the trade carries more risk than others and we may not even be able to get in. The other tricky part is that I will be away on Thursday and Friday and I don’t start new positions while going on vacation.
So, basically, I don’t like anything new this week because I won’t be able to follow the trade and more importantly, I won’t be able to update you about where we stand.
However, watch Buffalo Wild Wings (BWLD, $41.84, up $0.05) and Jacobs Engineering Group (JEC, $45.66, up $1.11). I think Buffalo could move higher but the Jacobs Engineering May 50 calls (JECEJ, $1.10, up $0.30) could get interesting if they fall below $1.00. Just throwing a couple more names out there for you to do further research on…
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7. Closing Thoughts
There is still plenty of volatility in the market and this week wraps up the month of April. I have been mentioning how I thought we would rally into May and then fade
So we got a mixed bag last week with earnings. The bulls got what they wanted by holding support while the bears seem to be waiting for the perfect opportunity to strike. The bears presence is still there which is causing the bulls to look over their shoulders.
The support levels held and with the month of May on the horizon those could be tested. Either that, or we stay stuck in a trading range. I just don’t see another rally in the cards unless the news about the banks on May 4th provides another catalyst.
I’ve been mentioning the old adage “sell in May and go away” which is exactly what I’ll be doing. There will not be a Weekly Wrap next week as I will be “away” for a few days starting on Thursday. I’ll be heading down to New Orleans for some R&R catching up with the best the music world has to offer at Jazz Fest.
It’s kind of neat how the Dendreon news will be out before I go but whatever happens, happens. Most of you made some really good returns on the first move from $7 to $22 and hopefully you rolled some of the position out into the August call options after the first pop while leaving a little on the table with the May calls. The returns have been incredible and here’s to a move above $30….CHEERS! And Good Luck!
Rick Rouse
Rick@OptionsMentoring.com
