Earlier this month in the Trader’s Radar column we discussed some tasty-looking action in biotech outfit Dendreon (DNDN) on the heels of its massive Provenge-related price spike. A mused bull vertical to take advantage of the situation would have proved a nice meal of profits for trading accounts as shares triggered through a 5-Minute Success Formula signal and continued to motor higher by about 25% before stalling and subsequently flagging technically into Tuesday’s session.
Shares of DNDN are up about 7.0% intraday on Tuesday but still trading within its bullish patterned range of the last two weeks on rekindled rumors of a buyer for the company. Personally, this strategist abhors “takeover chowder” as it’s usually more than a bit fishy and winds up going in the garbage with other unwanted stock morsels that quickly lose their taste with investors. That all said, with the fore-mentioned technical setup in mind and believing strongly that some gaps are more prone to at least partial filling than others; we do like shares of DNDN in that regard.
Figure 1: Dendreon (DNDN) Daily Bull Flag
The good news for bulls that are in agreement, with listed options the ability to position with limited risk and spread off at least some of Tuesday’s unsubstantiated hype and beefed up volatility risk is available if traders look to position with a bull vertical. Our belief is this type of subdued bullish play is also better served if one cuts down their typical position risk in half. If that percentage normally amounts to 2.0% of a portfolio, we’d look to execute a vertical on 1.0% of our capital.
At the moment and with shares of DNDN around 14.15, one point strikes allow for a countless variations on the vertical, especially if traders look at both the calls and puts. That said, we like the looks of one and two point spreads with the surrounding money to slightly out-of-the money calls such as the 13s through the 16s. With 24 days left until the February contract expires and given the described technical platform which looks ready for a move higher; we like the look of sacrificing time with the front month contract as the potential to reach a double and perhaps even max out one's profits is available sooner, just in case a prior bear gap begins to see bulls filling themselves up on some DiNDiN.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
