Playing DNDN’s Big News

Enter May Straddle Now

By Bryan Bottarelli
Tuesday, April 28, 2009 10:20 AM EDT
Tue, 28 Apr 2009 14:20:00 GMT

PLAY: Buy the DNDN May 30 Calls (UKO EF) and the DNDN May 10 Puts (UKO QB) at market, good for the day.

Dear Bottarelli Research Member,

This afternoon at 2:20 PM CST, all eyes will be on the annual meeting of the American Urological Association at Chicago’s McCormick Place convention center. That’s when Dendreon (DNDN – NASDAQ) will release data on their cancer therapeutic vaccine Provenge.

As you know, shares of DNDN have exploded since they released preliminary data on Provenge on April 14th, showing that the treatment was successful in extending the lives of men with advanced prostate cancer. But since DNDN did not offer any details from this study, all of the upside run has been pure speculation. This afternoon, DNDN announces their data from this trial — which will determine the fate of Provenge.

In short, if the data matches or exceeds their April 14th pre-announcement, DNDN could continue moving higher. If the data does not match or exceed what investors have come to expect, DNDN could get clobbered. To my eye, we’re looking at a $10.00 up-move or a $10.00 down-move. And to be perfectly honest with you, the odds of either move stand around 50/50.

DNDN

Based on this situation, I’d like to play both sides using a DNDN May Strangle.

By definition, a “strangle” is an options strategy where you hold a position in both a call and put with different strike prices. Both contracts have the same maturity and underlying asset. This strategy is predicated on the thinking that a stock will experience a large price movement in the near future, but you’re unsure of which way that price movement will be. This perfectly describes the situation we have now in DNDN.

Looking specifically at the options string, I’d like to combine the DNDN May 30 Calls (UKO EF) with the DNDN May 10 Puts (UKO QB). As I write, the calls are trading for just under $1.40 per contract and the puts are trading for $0.55. Therefore, you can own both positions for the total price of just under $2.00.

If DNDN moves up $10.00, your calls could triple. Perhaps they’ll move up even more. This would hand you a strong gain between 70% and 110% on the total strangle play. On the flipside, if DNDN moves down $10.00, your puts will probably increase five-fold. This would push them up to around $3.00 per contract, which would still hand you a strong 50% return on the strangle play. As you can see, a powerful move in either direction will make this position a winner. Considering how volatile DNDN has been lately, I think the $2.00 that we’re paying for both sides of the strangle play is worth the risk. Therefore, let’s enter the strangle play now!

PLAY: Buy the DNDN May 30 Calls (UKO EF) and the DNDN May 10 Puts (UKO QB) at market, good for the day. Buy each contract on a 1-for-1 basis (in other words, buy one call for every one put). Do not place any pre-determined sell orders on this play, as each contract is designed to work in tandem with one another. I will mange the position within your daily alerts.

In other news, it’s really quite amazing how quickly the bulls are buying every market dip. On two occasions this week, the markets have opened lower, only to recover all of the losses within the first 30 minutes of trading. It doesn’t matter if the news wire is reporting more bad news from Citigroup or Bank of America, or fears of swine flu. The bulls are buying every dip. Personally, I feel this is very dangerous. But then again, we must remain focused on trading the market moves, no matter if we believe in them or not. In many respects, that is why I recommended the CMED May 20 Calls (QCY ED).

This play was designed to offer us upside exposure, but unfortunately, prices triggered our stop loss this morning. Therefore, this play is now closed. Going forward, perhaps it’s a better idea to play an upside hedge on a major market average (like the SPX, for example). This would give us a better representation of the overall market movements. When it’s time to make such a play, you’ll be the first to know. Until then, maintain your existing plays on ABX, SRS, FAZ, and SMH. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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