Options Update: Dendreon’s Phase II Provenge Trial Sparks Put Volume Spike
Pharmaceutical concern Dendreon
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PowerRating) has been in the headlines quite a bit lately. On August 11, the Securities and Exchange Commission (SEC) completed an inquiry into the company’s alleged omission of materials related to Provenge – a prostate cancer drug currently under development by the firm. The SEC’s inquiry ended with no action being taken. Meanwhile, DNDN recently announced that it has begun a Phase II trial for Provenge in 120 men with advanced prostate cancer that did not respond to standard hormone therapy.
The firm also released its second-quarter earnings performance on August 12. For the quarter, DNDN posted a loss of 18 cents per share on revenue of $26,000. The figure bested analyst expectations for a loss of 22 cents per share. Looking ahead, Wall Street is expecting a 22 cent per share loss for the company’s third-quarter earnings report.
This wealth of news has sparked some interesting activity in the options pits recently. According to the International Securities Exchange (ISE), 10,185 calls were bought to open on its exchange yesterday, compared to just 112 puts purchased. However, this activity stands in stark contrast to DNDN’s put volume of more than 10,500 contracts in today’s trading. In fact, put activity so far today is more than 17 times the daily average trading volume, placing the shares on our Intraday Volume Explosion List. While this trading activity was certainly notable, it was the 10,283 contracts crossing at the stock’s November 2.50 put that caught my eye today.
Out-of-the-Money Put Buying?
Unlike yesterday’s ambiguous options trading on Wells Fargo
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PowerRating), today’s put volume on DNDN is a little bit more clear cut. Looking at the chart below of DNDN’s notable November 2.50 call (UKO WZ) block contracts, it would appear that put buying is gaining favor among options players. While most of the blocks traded were on the smaller side, there is 1 rather large block of 9,800 contracts that changed hands at an asking price of $0.30.
Focusing on the largest block of contracts, let’s speculate that these contracts were, in fact, purchased. The total outlay for the position would be $294,000, or ($0.30 * 100)*9,800 = $294,000. For this trade to reach breakeven, DNDN would need to fall roughly 62% to $2.20 per share. We arrive at this figure by subtracting the cost of the option ($0.30) from the strike of the purchased put 2.50 $2.50 – $0.30 = $2.20).
By entering this trade, our hypothetical trader is looking for DNDN to fall to the 2.20 level or below by the time the options expire on November 21. That’s a sizeable drop, but DNDN is considerably volatile, even for a pharmaceutical stock. Let’s see if the stock’s technical picture or sentiment backdrop offer up any clues on the potential for profit from this position…
Technically Speaking
A bearish position on DNDN begins on the right foot with an examination of the stock’s technical picture. The shares have been in a downtrend for the past several months, falling roughly 22% during the past 52 weeks. And even though the security has broken out above former resistance at its 10-week and 20-week moving averages, DNDN is struggling with resistance in the 6-6.50 region. This area created chart congestion for the equity from January though February earlier this year.
However, the 10-week and 20-week trendlines are on the verge of a bullish cross – a technical formation that could signal positive price action over the intermediate term. What’s more, the stock has long-term support at the 4 level. In order for the purchased November 2.50 to be profitable, DNDN would have to breach this support level and move sharply lower.
The Sentiment Drivers
Investor sentiment offers an equally mixed outlook for DNDN. Options traders are neutral-to-bearish on the shares, with the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.65 ranking in the 69th percentile of the past year’s worth of readings. Given the stock’s poor technical performance, a continued rise in this ratio could provide additional selling pressure for DNDN, offering a potential modicum of support for the purchased put position.
Elsewhere, short interest accounts for a whopping 36% of the stock’s total float. In terms of our hypothetical purchased put position, this indicator does nothing but work against our position. With DNDN trading in the single digits, it become much more difficult to short the shares, thus decreasing the potential for additional selling pressure on the equity. Meanwhile, any positive news that spooks these short sellers could create a short-covering rally – a potential development that could easily scuttle a bearish option position.
Finally, Wall Street analyst ratings are also a detractor to a purchased put position on DNDN. According to Zacks.com, all 8 analysts following the shares rate them a “hold” or worse. Any positive developments on the Provenge situation could prompt upgrades from these bears, potentially increasing buying pressure on the shares.
The Verdict?
With staunch technical support at the 4 level, and a wealth of bearish sentiment already levied against the shares, our hypothetical November 2.50 DNDN put looks like a long shot. The problem is that the shares could continue on their slow grind lower, depleting the time value of our option without ever netting any profit on the position. For the shares to plunge 62% by the end of November, the company would have to issue bad news for Provenge or another key drug in the company’s pipeline. While this is certainly a possibility, the risk in this situation just doesn’t seem to justify the reward.
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