Dendreon is up to its old tricks again.   For most of 2006, this stock (symbol DNDN) hovered around the $5 mark.  Then it briefly shot up to the $15-$20 range on hopes for a quick FDA approval of its Provenge prostate cancer drug.  After an unfavorable FDA decision, the stock quickly dropped to the $5 range, and was as low as $2.55 over the last month.  The stock recently got another boost from renewed rumors on Provenge and it currently trades around $6.35 at last check.

The DNDN stock chart can be seen here.

For option traders and speculators, the volatility in Dendreon’s shares is much more interesting than the back and forth discussions between Dendreon and the FDA.  And with high volatility comes opportunity.  According to this AP article, Dendreon was invited to present data to the American Urological Association on April 28 in Chicago, and that news likely sparked the recent rally in its shares.

As an option trader, here is the play that I like on DNDN:

  • Purchasing shares in 100 lot increments – trading near $6.39 at last glance
  • Selling the May $5.00 in the money COVERED CALL – last glance near $3.10 per contract
  • Buying the April $5.00 PUT – last glance near $.50 per contract

The above trade is what I executed this morning.  I may or may not close the April 5 PUT early.  More aggressive option traders may like one of the following:

  • Purchasing DNDN (~$6.39) and selling the May $7.50 strike covered call for roughly $2.30 per contract
  • Or…Purchasing DNDN and selling the May $5.00 in the money call

Note the lack of PUT protection in the last two choices.

Disclaimer: As always trade at your own risk!  The author is long DNDN, with a covered call and put protection in place.