This site discussed a play on DNDN just a few days ago, with this article.  Implied volatility had spiked in DNDN due to the announcement of an April 28th conference with the AUA (American Urological Association) that DNDN was invited to.  The conference is not the FDA, and had no capacity to approve or deny Dendreon’s Provenge drug.  But nonetheless, the spike in volatility provided ample opportunity to sell some premium.  With my own account, I took the conservative approach with a calendar collar (Buying the shares and the April 5 PUT’s, and selling the May 5 Calls).  I also announced a more aggressive play of just buying the shares and selling the May 5 Calls or May 7.50 Calls (without the added PUT protection).  Take a look at the chart of DNDN – before and after our entry into the DNDN calendar.


dndn-spike

If you played along with the DNDN play, then regardless of which play you did, you have already collected over 90% of the profit potential well ahead of the May option expiration.  This is due to the delta effect.  Prior to the GAP UP, the May 7.50 strike options were out of the money.  After the gap, those same options are now deep in the money.  The more in the money the option is, the more it behaves like a stock,which means that most that time premium sold from the original covered has already been collected.  Here is a recent snapshot of the option chain data:

  • DNDN last traded at $17.20
  • May 7.50 strike call is about 9.85
  • Adding 7.50 (strike) to 9.85 option price comes to $17.35, which is just 15 cents higher than DNDN shares.

If you stay in this particular trade through May expiration you will only collect another $15 per covered call contract, but you risk making it through potentially damaging conference news on April 28th.  Rather than risk everything for a few dollars more, covered call players on DNDN have the opportunity to close the entire position on the delta effect.

To close the position, simply buy back the originally covered call you sold (BUY TO CLOSE), and then *IMMEDIATELY* sell the Dendreon shares.

Disclaimer: This post is informational only, and not advice of any kind.   Trade at your own risk!

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