11:30pm (EST)
The sleeping giant is awake…
Dendreon (DNDN, $27.43, up $3.59) had a huge day as the stock gained 15% after opening lower this morning. Shares started the session at $23.64 and traded as low as $23.51 before takeover rumors kicked into high gear. The early buzz is Dendreon could be getting a $40 bid from a big European company.
Needless to say, we were once again all over this setup. For those of you who are new to the Blog, Dendreon has been a steady topic of mine for years. And once you have followed a stock for quite some time, you will “get a feel” on how it trades. If you have already signed up for a subscription then you have seen the current Dendreon trade in the Members Area. In fact, it was the last FREE trade we profiled before we launched Momentum Options Trading. We have a lot of new faces that have recently joined us so I’d like to catch them up to speed…
From the Weekly Wrap on August 30th (quotes are from that day):
This was the last FREE option trade before we launched our Members Only subscription service…
“It has been a while since I have mentioned Dendreon (DNDN, $23.78, down $0.74) here in the Blog but it is STILL a stock I watch daily. Many of you have been following me when the stock was below $5 back in March and saw the explosion in the shares when news of its cancer drug, Provenge, took Wall Street by surprise.
I have been following the stock for years so I’ve become enamored with the company. I was fortunate enough to catch some of that action from $5 to $27 earlier this year. Some of our members made upwards of 2,500% on the option trades I profiled and they can researched by typing “Dendreon” in the search box. I also profiled a number of call AND put options when the story on provenge broke over two years ago.
There were a ton of talking heads telling everybody how risky this stock is and even Mr. Mad Money was telling you to stay away from the stock. I was going against the grain because I knew the story and I was blogging about it daily. Here is a chart for Dendreon over the past two years.
But that was then and this is now. The next chart I want to show you is the move from $5 to $27 for this year:
Now, notice how since May the stock has stayed in a”channel” after the explosive move? In 2007, after the drug was denied FDA approval, it spent the next two years consolidating in the single digits. For two years.
We then got the big move this year and the stock has done nothing since May. It is building the same base but at higher levels.
When you have stock that is “channeling” then usually a breakout eventually occurs either to the upside or downside. Basically it all comes down to timing and this is where beginning option traders make mistakes. We know the stock makes huge moves on any company drug new news and they are also building a nice pipeline. But Dendreon’s baby right now is Provenge and it is about to grow up.
The potential of FDA approval this time around is almost 100% and is expected in December. The company has already begun building a $70 million manufacturing plant in Hot-lanta with a 10-year land lease and will launch Provenge from its New Jersey manufacturing facility which is being expanded.
Dendreon has also made it no secret that it is searching for a corporate partner to market Provenge outside the US. In fact, a recent comment from it’s CEO, Dr. Mitchell Gold, was “we are in active discussions.” That sets the stage for worldwide sales, folks.
The company recently reported a huge loss in its most recent quarter as it prepares to bring the drug to market next year.
Most of my observations on Dendreon is positive and the one thing that “kinda” worries me are the arguements being made that expensive prostate cancer treatments must be made if we are to reform our nation’s bloated and expensive health care system.
However, it doesn’t change the fact that the stock could be on the move over the next few months. December is a given that we could see some movement because of the FDA news but we will also get a clue in September when the company has its webcast with Wall Street.
The timing thing I was talking about earlier is that some option traders might be betting on this conference call by playing the September options. Well, they expire on the 18th and the conference is a week LATER. There were some September call strike prices that traded over 1,000 contracts on Friday but the November 45 calls (UQBKO, $0.32, up $0.01) traded nearly 3,000 contracts. This was about 500 more contracts than the open interest indicating some traders are bullish.
There are so many things that can happen between now and November. There are no listed December options, yet, on Dendreon and the November 45’s were the most active of the option strikes.
The stock has been slightly volatile of late because of the healthcare debate but there is also the chance of a partnership which could easily bring Dendreon a couple of hundred million.
These November 45’s are currently going for 32 cents and could get cheaper if the stock drifts lower. Since these things are so hard to time, Dendreon could be having this webcast for a number of reasons we may not even know about. I know I’m speculating but maybe there is something that moves this stock before then.
If you buy 30 contracts it would cost you about $1,000. To buy 1,000 shares of Dendreon it would cost you about $24 grand. That is the leverage that options provide and there is no clearer picture than that.
The 45 call strike price means that Dendreon must be above $45 a share for the options to be “in-the-money”. If not, these options will have a value of $0 even if the stock is at $44.99 by November.
This doesn’t mean that the call options won’t make money if the stock is not at those levels but these options could lose up to 50% in value before November gets here. The options are also more expensive because of the volatility.
I wouldn’t go out and buy normal positions this week. Instead you might want to do the trade in third’s or half’s. That means if you normally do 20 or 30 contracts, buy only 10 or 15 contracts. Then, if they get cheaper when Wall Street gets back from vacation (the market is closed next Monday) then we maybe complete the other half.” (END)
Since this was the last trade we profiled, I also wanted to review it here in the Blog and not in the Members Area in case some of you may have gotten in.
The Dendreon November 45 calls (UQBKO, $0.55, up $0.30) were profiled at 30 cents so we pretty much have a double on our hands. The stock was up 52 cents in after-hours to $27.95 so the calls should continue higher if we hold going into the open on Tuesday.
Now, THIS IS IMPORTANT.
I had mentioned that a buyout could come at $40 and if so that could/ would spell trouble for these call options. If a bid of $40 were to come out in the next few days then these calls would lose a ton of premium and we could turn a profitable position into a bad one.
If we own the November 45’s and the bid comes in at $40…see what I’m saying?
As such, it’s best to close at least half of the position and bank that triple-digit return instead of getting caught holding the bag. Personally, I hope a buyout DOESN”T come because I have loved trading Dendreon over the years. However, if it does, it does. A buyout could come at $60, who knows but we have to be smart about the situation.
Dendreon’s 52-week high is $27.54 which was also today’s high. Somehow I have a feeling we could go to $30 quickly. We will have to watch the developments closely and you don’t have to close half right at the open but do take advantage of locking in profits while the rumor mill kicks in high gear.
I’ll be back in the morning with the trade updates and the morning outlook. This will be the last update I do on Dendreon in the blog. The rest of the Dendreon updates will be covered in the Members Area from here on out…
