Call Trading Spikes on Dendreon

              

Hopes are running high for biotechnology firm Dendreon (DNDN: sentiment, chart, options) , as options players continue to snatch up the security's calls. The International Securities Exchange reported that during the past 10 trading sessions, the stock has seen more than 20,400 calls bought to open compared to roughly 3,300 puts. Overall, this results in a call/put volume ratio of 6.27, or 6 calls purchased for every 1 put.

Drilling down on the security's short-term options configuration, we find the same preference for bullish bets. The Schaeffer's put/call open interest ratio rests at an annual low of 0.14. In other words, at no other time during the past year have options players been more bullishly aligned toward the shares.

Where are Short-Term Speculators Focused?

Looking at options in the February series, we find that peak call open interest resides at the out-of-the-money 7.50 call with more than 127,400 contracts in residence. Meanwhile, the February 10 call comes in a distant second with nearly 45,000 contracts. The May series is starting to shape up similarly, with open interest at the 7.50 call amounting to almost 27,000 contracts. With the stock trading at 6.20, the shares of DNDN will need to rally almost 21% just to put these options in the money.

On the other hand, put open interest isn't as heavy on the stock. The in-the-money February 7.50 put is the site of peak put open interest with roughly 16,400 contracts. The February 5.00 put has open interest of nearly 5,000 contracts. This lack of put open interest indicates that short-term investors don't expect the shares to fall during the near term.

Betting on the FDA

On January 15, European authorities granted Dendreon's prostate cancer vaccine candidate Provenge a broad patent, which covers Provenge's composition along with similar drug candidates using the same technology.

The drug is currently under review by the Food and Drug Administration (FDA). Before the close of 2007, the FDA advisory panel recommended approval for the drug last year, but the regulatory agency is waiting for additional study data to make a decision.

However, the Securities and Exchange Commission had gotten involved in the matter, as the agency is conducting an informal inquiry into the Provenge application and Wall Street has expressed concern that the drug may not be approved in the near term.

The Technical Breakdown

The shares of DNDN are trapped in a narrowing trading range, as the stock continues to make a series of lower highs and higher lows. A breakout above the upper trendline would have bullish implications, while a breakout below the stock's lower trendline would have bearish implications for the equity.

From a longer-term perspective, the security is facing staunch resistance at its 20-week and 80-week moving averages, which reside near the 6.50 level. Since mid-October, DNDN has logged only 1 weekly close above both of these intermediate-term trendlines.

A Few Signs of Bearish Sentiment

While options players are looking for a quick pop higher in the shares, not everyone shares their outlook. Wall Street, in fact, has grown quite skeptical of the shares. According to data from Zacks, the stock has earned 5 "hold" ratings and 5 "sells." This configuration leaves ample room for upgrades should the shares finally win the approval of the FDA.

Short sellers have also loaded up on the bearish bets toward DNDN. More than 32.7 million DNDN shares have been sold short, accounting for roughly 39% of the company's total float. This accumulation is 7.5 times the stock's average daily trading volume. A positive report from the company and/or a breakout above technical resistance could help to shake loose some of these bears, resulting in a fresh wave of buying pressure. However, much of this potential buying pressure remain contingent upon the company finally winning FDA approval.

For timely commentary on today's market-moving news from me and my colleagues Andrea, Elizabeth, Beth, Joseph, and Mark, please visit our Schaeffer's Daily Market Blog section throughout the trading day.