OK, disclosure. I have a modestly bullish position in Dendreon (DNDN - commentary - Cramer's Take), a drug company that Adam Feuerstein has covered in depth, calling its meeting with the FDA regarding its prostate cancer vaccine drug Provenge, a date with destiny on March 16. The stock has ramped from some about $1.50, or over 40%, in the past three trading days, but implied volatility of its options has also increased astronomically to above 200%, creating a brain teaser on how to lock in some profits, and a bit more importantly, unleash the upside potential.
OK, again, taking two steps back, my position in the Option Alert model portfolio has a cost basis of $2.90, but profits are capped once the stock rises above $5 per share. So now with the stock trading around $5, I wouldn't mind finding a way to reduce my risk by buying puts and increasing the upside potential. I thought I could buy some $5 puts, but even with the stock up 10%, or 50 cents, today, the price of the April $5 puts has increased 20 cents to $1.90, so that's is no help.
On gaining upside, I thought about buying more shares and then selling the $7.50/$10 call spread for 30 cents credit. That would leave me outright long once the stock crossed $10, but only offers protection down to around $4.50 per share. Word has it if the feedback on Provenge is negative, then the stock will trade down to the $1.50 level. To further illustrate the way these options get you boxed in, the $2.50 put is STILL trading 30 cents, which is were it was when the shares were $3.35, or about a buck lower. That is just too pricey for an insurance policy on a stock that I do not think is going to zero.
One way to go might be to buy stock and create a covered call by selling $10 calls for 50 cents and then set up a bearish butterfly using the $7.50/$5/$2.50 strikes for a net debit of 20 cents. This gives you $5 of upside and protects you down to $3.00 per share. Like I said, this one has become an enigma wrapped in a riddle, and if I can make $2.10, or 45%, in the next few days using a simple two-strike strategy, then call me the village idiot.
P.S. Will you be there when Cramer makes his next move?
Strong brands and companies with vast market exposure can help bolster your portfolio. Jim was able to lock in a 64% gain by buying Ingersoll-Rand at $13 and selling at $22.50. Action Alerts PLUS members were the first to see these moves. Were you among them? Get Free Access Today!
Steven Smith Blog VIX Pop 3/26/2007 12:14 PM EDT Volatility of volatility measures are very high right now.
Steven Smith Blog A Floor to Stand On? 3/26/2007 11:00 AM EDT I was turning bullish on the homebuilders until the news this morning.
Steven Smith Blog S&P 500: Home on the Range 3/26/2007 8:52 AM EDT The major indices now face overhead resistance.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.
RSS FEEDS
PODCASTS
