23-08-07

80 % airbag?

You know from our previous posting that we have sold our position in DENDREON (DNDN - USD 7.70). We nevertheless want to keep an exposure in the stock. Dendreon has become a relative stable stock these days. That was different in the first half of the year with some erratic price action. A chart can be seen here: http://stockcharts.com/charts/gallery.html?dndn . The reason for the relative stable behaviour is that there is nothing spectacular to be expected from the biotech company in the near future. Only by the summer of next year the FDA will come up with its review status on Provenge, a potential blockbuster active cellular immunotherapy for the treatment of prostate cancer. Longer dated options put options are expensive, an expression of the anticipated volatility increase after the FDA decision. We want to exploit these high put prices by selling some puts. We give an order to sell 20 January 2009 USD 2.50 puts at a price of USD 0.90. Till the strike of USD 2.50 Dendreon can drop by 67% from the actual levels. Even if the stock would fall by 67% by January 2009, we will still make USD 1.800 (the premium we received from selling the puts). This implies a return of 36% on the amount needed for a possible buy ( 1.800/5.000) . Only in case the stock would trade below USD 1.60 in 16 months time we would make a loss on the position: in other words, DNDN is ‘ allowed’ to sink by as much as 80 % before we make a loss on the position. That is quite an airbag, isn’t it? Not bad at all, if you ask me. Here is the actual option price: http://finance.yahoo.com/q?s=ORGMZ.X.

16:45 Gepost door in Orders | Permalink | Commentaren (0) | Tags: dndn |  Facebook |

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