Schaeffer's Trading Floor Blog

Dendreon Corporation (DNDN) Option Traders Anticipate New Lows

Analyzing the recent spike in DNDN put buying

by 9/30/2013 10:42 AM
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Drug maker Dendreon Corporation (NASDAQ:DNDN) has surrendered almost 45% in 2013, much of which came via an earnings-induced bear gap in early August. Furthermore, the shares have underperformed the broader S&P 500 Index (SPX) by more than 35 percentage points during the past three months, and are now lingering near $2.91. In the options pits, traders are gambling on even more downside for DNDN, as evidenced by the healthier-than-usual appetite for bearish bets of late.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.43 stands higher than 79% of all other readings of the past year. In other words, while long calls still outnumber puts, speculators have picked up the latter relative to the former at a faster-than-usual clip during the past two weeks.

Garnering the most attention has been the slightly out-of-the-money November 2.50 put, which has seen more than 5,100 positions opened during the past 10 sessions. Digging deeper, most of the action was of the buy-to-open variety, with 5,000 contracts purchased on Sept. 17. Considering DNDN tagged a one-month high of $3.41 that day, the puts could've been bought as options "insurance" on a long stock position.

If the buyers are bearish, they'll begin to profit if DNDN sinks below the strike -- in territory not charted since August 2002 -- by options expiration on Friday, Nov. 15. If they own DNDN shares, their primary goal remains for DNDN to move higher, but the puts lock in a short-term acceptable price at which to hit the exits ($2.50 per share), should DNDN take a turn for the worse.

Delta for the put is negative 0.28, implying a roughly 28% of moving into the money before expiration. Risk, meanwhile, is limited to the initial premium paid for the puts, should DNDN remain north of the strike.

Whatever the motive, now is an opportune time to gamble with Dendreon's short-term options. The stock's Schaeffer's Volatility Index (SVI) of 70% stands just 15 percentage points from a 12-month low. Or, in simpler terms, DNDN's near-term option premiums are inexpensive right now, historically speaking.

Despite the growing appetite for long puts, short-term option traders are more call-heavy than usual. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.40 indicates that calls more than double puts among options expiring within three months. Plus, this ratio sits just 4 percentage points from an annual nadir, suggesting near-term traders have rarely been more call-biased during the past year. (Of course, considering DNDN is trading in the low-single digits, it's not too surprising to find a call skew, as profit potential from buying puts is limited.)

The rest of Wall Street remains decidedly bearish on the underperformer. Just two out of 17 analysts consider Dendreon Corporation (NASDAQ:DNDN) -- which is presenting Provenge data to the European Cancer Congress this week -- worthy of a "buy" or better endorsement. Meanwhile, short interest accounts for 36.7% of the stock's total available float, representing nearly three weeks' worth of pent-up buying demand, at DNDN's average daily trading volume.

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