Most of the time, options are great tools for hedging or speculating, but when it comes to the world of biotechnology and the FDA approval process, sometimes these options just become too expensive to effectively use for making volatility trades.
Take Dendreon (DNDN). Its Provenge is widely expected to be (finally) approved in May, as a last line of defense for advanced prostate cancer patients.
In recent weeks, the stock has seen analysts giving it high marks, but this week it was downgraded based upon valuation. The $5.35 billion market cap may still be somewhat understated on a fully diluted basis.
To play options out to May is extremely expensive. With the stock around $40 today, buying a straddle for that pure volatility is almost out of the question. The DNDN May 40 Call (UQB 100522C00040000) is priced at $5.50 and the DNDN May 40 Put (UQB 100522P00040000) is priced at $5.60. This means the stock has to move more than $11 up or down (above $51 or below $29) before May 21, for the volatility trade to work.
And forget about trying to buy more time value by going out into the summer months. The August 40 straddle for the pure volatility trade will cost about $16 ($8 for the call and $8.05 for the put). That puts the volatility bet breakeven at above $56 or below $24.
If Dendreon had traded at $70 and $20, things might be different, but the stock’s 52-week trading range is $7.50 to $40.47.
The issue is that FDA approval is expected this time around, but the highest analyst price target on the Street is $50. Even with an expected approval, the analysts only have so much more upside.
If you want to add fuel to the volatility fire, Dendreon’s short interest is now over 13.3 million shares. That has grown in each of the last four reports. Some is options hedging, and some is traders betting that Provenge will not be approved or that it will not be widely used.
The open interest is huge in this one, with more contracts stacked up for the May expiration. If you want to make an FDA bet on Dendreon, you are unfortunately going to be forced to pick a direction here and wait. The straddle is simply too expensive.
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