One in every six men in the United States suffer from prostate cancer. There is almost unanimous belief among analysts that Dendreon will have no problem getting FDA approval. If approved, sales are expected to jump to as high as $2.5 billion by 2011 (I have seen estimates of $1 billion to $5 billion with many analysts around $2.5 billion).
I already have a trade on since March 22: DNDN Call Ratio Spread. For now, I plan to hold the trade through FDA decision. But if anything changes, I will communicate through housekeeping note.
Currently, May at-the-money straddle is pricing $13 or 32% move on FDA decision. I believe if FDA comes out with outright denial, the straddle is significantly underpricing the move as I can see the stock collapsing to single digits. With an outright approval, I see the company commanding minimum market cap of 3x potential sales or $7.5 billion which puts a near term price target of $55-60 range. Stock currently trading around ~$40.00.
I will be watching closely option activity periodically everyday to check the pulse. Some readers have asked me to provide other ways to trade DNDN. Here are a few setups. Note that these setups are suggested with idea in mind "what if" you're wrong. I will not suggest to outright buy calls or puts. Regardless of your sentiment and trade set up you choose from below, the first priority is to minimize your risk in case you're wrong.
1. If you believe the treatment will get approved and the straddle is under-priced, then I suggest the following bull call ratio spread:- Sell to open 1x May $30 calls
- Buy to open 2x May $40 calls
The natural asking price on whole structure is exactly $0.00 (mark is $0.20 credit). The setup will require a move above $50 to produce profits. Gains are unlimited. On a bad news if stock collapses below $30, there is no gain or loss.
2. If you believe the treatment will be disapproved, then you sure also believe that straddle is way under-pricing the potential move to the downside given the stock was trading at $7 a year ago. In that case, I suggest the following bear ratio spread: - Sell to open 1x May $50 puts
- Buy to open 1.5x May $43 puts
The whole structure can be done for $0.25 net credit. The structure will require a move below $29.25 to turn a profit. But if you're wrong and the news is good and the stock rips higher above $49.75, there is nothing to lose as both legs expire worthless and you just keep the credit.
3. If you believe the treatment will get approved but the straddle is over-pricing the move to the upside, then I suggest the following diagonal bear call spread:- Buy to open Jan'11 $55 calls
- Sell to open May $50 calls
The whole structure can be done for $3.75 net debit. Notice I am using LEAPS Jan'11 for the long leg because of IV skew (Jan'11 at 85 vs. 160 in May). The break even range in this trade is very large. The trade remains profitable anywhere between $36 and $69. Therefore, if you're wrong and it turns out that the straddle was under-pricing the move, the trade should still produce a profit as break even on the upside is $69. I expect very minor decline in Jan'11 implied volatility, if any.
4. If you believe there will be no outcome by FDA and the decision will be delayed (it has happened with DNDN at least twice before in last several years), then there is a chance that the stock will get hammered but not nearly as much as it would if there was an outright denial. In other words, you're negative but believe the straddle is over-pricing the move to the downside. In this case, I suggest the following diagonal bear call spread: - Buy to open Jan'11 $40 calls
- Sell to open May $35 calls
The structure can be done for $1.70 net debit. The trade is betting on stock falling below $35 but not below $20. If you're wrong and the stock rips higher, the trade still remains profitable as long as it stays below $55.
Good luck!
