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Dendreon Gaps Higher, Draws Bullish Speculation

Speculators took a shine to DNDN's 8-strike calls

by 6/14/2012 8:19 AM
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The shares of Dendreon Corporation (DNDN - 7.11) gapped higher yesterday, thanks to pharmaceutical-sector tailwinds, a fresh "buy" rating from Summer Street Research, unsubstantiated takeover chatter, and hints that the firm may find a marketing partner for its Provenge therapy across the pond. Against this backdrop, the equity saw a significant surge in single-session options activity, especially on the call side of the tape.

By the closing bell, DNDN had seen roughly 40,000 calls and 18,000 puts change hands, compared to its average daily volume of around 5,200 calls and 4,100 puts. Garnering notable attention was the out-of-the-money August 8 call, which saw close to 4,500 calls cross the tape -- a healthy portion of them at the ask price, hinting at buyer-driven volume. Plus, call open interest at the back-month strike jumped by 3,726 contracts overnight, confirming the initiation of bullish bets.

In the same vein, a few more-aggressive traders scooped up DNDN's June 8 calls, of which almost 5,400 contracts changed hands. Again, the bulk of the out-of-the-money calls traded at the ask price, and call open interest at the June 8 strike increased by nearly 1,900 contracts, pointing to buy-to-open activity. By purchasing the calls to open, the traders are expecting DNDN to surmount the $8 level by the end of the week, when front-month options expire.

However, yesterday's affinity for calls is becoming par for the course. During the past 10 sessions, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open almost six DNDN calls for every put. In fact, the equity's 10-day call/put volume ratio of 5.93 ranks in the 78th percentile of its annual range, implying that options traders have bought to open DNDN calls over puts at a faster clip than usual.

Nevertheless, DNDN's fan club is still far from crowded. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.84 stands just two percentage points from an annual peak, indicating that short-term puts (expiring in the next three months) have rarely been more prevalent over calls during the past year.

In similar fashion, the security sports just four "buy" or better ratings from analysts, compared to 16 "hold" or worse recommendations, meaning yesterday's positive initiation was relatively rare for DNDN. Plus, short interest accounts for nearly 23% of the stock's total available float, and would take more than six sessions to buy back, at the equity's average daily trading volume.

Technically speaking, DNDN soared 13.8% by the time the dust settled yesterday, topping its 10- and 20-day moving averages for the first time in more than a month. If the stock can parlay its recent advance into something sturdy, another flood of upbeat analyst attention, a short-covering rally, or an unwinding of pessimism in the options pits could work to its advantage.

Daily Chart of DNDN since May 2012 With 10-Day and 20-Day Moving Average


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