Friday, April 3, 2009

Dendreon Dice Roll

Dendreon (DNDN) is a small cap Seattle biotech company that has been working on a highly controversial prostate cancer drug the last several years. The drug Provenge has been in phase 3 testing the last two years since the last time DNDN had a date with the FDA. Back then the stock shot up from $5 to $25 in a matter of days as the FDA panel recommended approval of this drug. Weeks later the FDA rejected the decision and DNDN got crushed as it came back down to the mid single digits. Now after a few years more of safety tests DNDN is back in the spotlight and looking for FDA approval after the latest results of Provenge are released at the end of April.

Back in October it was confirmed that Provenge reduces the risk of death in prostate cancer patients by 20%. The FDA said they wanted to see 22% to approve. So there is a fairly good chance that the extra 6 months of safety testing may result in that additional few percentage points that are so important to the FDA.

On Friday the stock spiked higher 38% on huge volume when the American Urological Association announced it had reserved a time slot at one of its upcoming scientific meetings for Provenge researchers to present findings from a late-stage trial of the product. With the stock near 6 and still 4 weeks before the release of data for Provenge I would be looking at the stock and potentially willing to gamble on this dice roll as I am calling it. Its likely that the stock retreats a lot of the spike it saw Friday because news should be scarce until month end and DNDN has a history of seeing that kind of pop and drop action. If we see any sort of retrace back towards 5ish then I would look at going long some May call options as this puts much less capital at risk than buying the stock, while at the same time boosting your potential reward thru the magic of leverage.

The options are expensive, but expensive for a reason. May open interest is huge with strikes 5 and 10 seeing most but even the May 30 calls have over 1000 open interest meaning that people definitely think this pup could soar between now and May. Taking a look at the implied volatility (the measure of how expensive an option is) in the May calls you can see just how in demand these options are.

DNDN options

May 5 call IV 325% Bid=2.75
May 7.5 call IV 312% Bid=2.00

May 10 call IV 331% Bid=1.65

At the same time you can compare a similarly priced stock like DRYS and see just how unreal the implied volatility in DNDN actually is.

DRYS options
May 5 call IV 146% Bid=1.10

May 7.5 call IV 136% Bid=.35

May 10 call IV 135% Bid=.10

Looking at what option to choose it depends on where you think the stock will be by May expiration. Back in 07 when DNDN had a favorable outcome to the FDA panel the stock soared to 25 within days. So assuming (and yes thats all we can do) it can do the same then you are better off going with something like the May 10 call options.

If you bought 10 of the May 10's at 1.65 (total cost of $1650) and the stock went to 20 then the options are worth at least 10 a piece, turning your $1650 into $10k. If the stock goes to 15 then they are still worth at least 5 turning your investment into $5k.

The May 5 calls are going for about 2.75 right now and would go to at least 15 if the stock was at 20. So you can see that the May 10 calls are gonna give you more bang for your buck IF the stock spikes. As you can see this has the potential to be one of those once a year type grand slam trades that we love to watch in the options market.

Again, I gotta emphasize this is a binary event that will certainly result in DNDN tripling or quadrupling or getting halved overnight. You should be prepared to lose every penny you put into this trade if you use options because it is nothing more than a dice roll. But if you can't make it down to Vegas this year then you might wanna try your luck with some May call options on DNDN.


Anonymous said...

How did you find out about Dendreon (DNDN). was it one of your pattern setups??

Jason said...

No, I have been watching the stock for awhile and just started following it closer since news is coming out.

Anonymous said...


Jason said...

Nope, I didn't buy in time. Oh well.