1. Commentary
2. Take-Two Revisited
3. Is Dendreon Headed for Double Digits?
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

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1. Commentary

The market got off to a good start last week but struggled to hold onto gains by the end of a five-day work week. It was pretty volatile but I had mentioned that there was a good chance for us to close higher for the week. We did, but Friday was a struggle. After the financial stocks lost steam and with it being quadruple options expiration day, the sentiment was negative which led to many stocks being pushed below key option strike prices.

When it was all said and done, the Dow still managed nearly a 1% gain for the week by adding 54 points to finish as 7,278. The Dow hit a peak of 7,624 and tested a key resistance level Thursday morning before fading but still held major support at 7,000-7,200. The upper-end range that I had targeted for the Dow was 7,600-7,800 so I knew we could retreat once we pushed up against these levels.

The Nasdaq advanced by 26 points, or 1.8%, to close at 1,457. We were looking for 1,500 and sure enough the Nasdaq traded to a high of 1,509 but could not close above this level Wednesday, Thursday, or Friday despite trading above it all three days. It will be important for the Nasdaq to hold the 1,400 level.

The S&P 500 chipped in with a 12 point gain, or 1.6%, and ended the week at 768. It too, mirrored the Dow and Nasdaq and made a run to 800. That is where we ran out of gas and for the S&P 500 to hold 765 was a relief for the bulls.

Naturally, we were due for a pullback as the market had gained about 20% in two weeks. However, I’ve talked about “bear market bounces” and I’m not so sure we have seen the last of this rally. The problem was that the currrent bounce ran right into resistance and it could be a struggle to clear those hurdles. If the market can clear the 50-day moving averages then we could rally into April which is where the old Wall Street adage could come into play…”Sell in May and go away”. We still have to get through March though and first quarter earnings will come into play over the next few weeks. So you can see how this is shaping up.

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2. Take-Two Revisited

A couple of weeks ago I talked about the idea of going long on Take-Two Interactive Software (TTWO, $8.57, up $0.42). At the time, the stock was at $6.85 and the company was reporting earnings in a couple of days. I get a lot of emails on how I come up with trade ideas so I thought I would walk everybody through this one in more detail.

To start, a lot of my ideas come from my Watch Lists which I have covered numerous times and if you haven’t started one (or 10) then start with one and go from there. You can start with an “Oil” stock Watch List, or a “Bank” Watch List, or a “Gaming” stock Watch List. Take-Two is one of the stocks on my Gaming Watch List so I follow it daily.

The first thing I told you about was the hostile takeover that the company had rejected with Electronic Arts (ERTS, $18.22, down $0.72). The offer was $27 a share and at the time, Take-Two told its shareholders that the company would be better off if it remained independent. That trust has been put to the test.

I felt there was a good chance the company could beat the lowered expectations with its earnings report which would be a start in the right direction. I wasn’t getting too excited though because the company had been bleeding money and they were expected to report another loss.

What I was excited about was the deal I told you Take-Two has with Microsoft (MSFT, $17.06, down $0.08). Digital delivery is picking up steam and Take-Two can cash in by doing episode installments on its most popular games. Not only that, I think Take-Two could still be a nice acquisition target and that area has been super hot lately.

Having said all of that, I’m also a realistic and the stock’s move from $7 to $9 has been pretty quick especially when the company gave a second quarter outlook that was below Wall Street’s expectations. Perhaps the company is “sand-bagging” its numbers and doesn’t know what shape digital delivery will take but the rally in the stock has been good for the June 10 calls (TUOFB, $0.85, up $0.20).

These call options were trading for 25 cents at the time of the original write-up and as you can see, they are up 200%. These were cheap “out-of-the-money” options that I said would be worth $1.00 if the stock can make it to $11. If the shares can make it to $10.50, I said it would still be a double. Well, lucky for us, the trade has already reached our expectations without the stock having to break double-digits.

If you had invested $500 to buy 20 contracts, you are now looking at $1,700 in your account. If you didn’t close the trade with Friday’s 5% pop in the stock then at least set stops at 75 cents or even 65 cents. We were looking to cash out between $1,000 and $2,000 and as you can see, we have pretty much reached the top. Yes, you could close only half of the position but once a trade has performed this well, why push it? The stop will keep you in and raise it along the way if the stock continues higher.

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3. Is Dendreon Headed for Double Digits?

I did a write-up on Dendreon (DNDN, $4.02, down $0.12) last Thursday in the blog and I wanted to run it in the Weekly Wrap in case you missed it. I have updated the quotes to reflect Friday’s closing prices. Nothing has really changed except the fact that DryShips (DRYS, $4.49, down $0.83) went up and down like a yo-yo Thursday and Friday. I have received a ton of email on Dendreon so I added an update at the end. –

“Investing in Biotech stocks can be an exciting, yet risky investment. Investing in Biotech options can takes that same risk/ reward to another level. Assessing how these stocks react to certain news concerning FDA approvals and clinical trials is an art in itself and requires specialized knowledge. However, once you learn the process, there are times where the profits you can make off one trade will be more than most people make in a year.

Biotech stocks can experience extreme volatility as drugs pass through different phases and Food and Drug Administration (FDA) processes. In most cases, the rise and fall of a company’s stock price can be tied to one important drug. It’s the one drug that can take a small biotech firm and make it into a major one. All it takes is a billion dollar drug.

When you hear about a company’s drug passing through clinical trials you want to watch for how effective the drug is and if there is a good chance it can gain approval. Then you have to figure out what the potential sales for the drug are.

The homework is essential because options traders live for these types of trades because if you own the right call or put options they can make you as much as 500%-800% on the news. That was not a typo.

One stock that I have been watching for a couple of years now may be on the verge of doing just that.

Dendreon (DNDN, $4.02, down $0.12) has been making headlines lately after reporting better-than-expected earnings but Wall Street is eagerly awaiting the outcome on one of its cancer drugs, Provenge. This is Dendreon’s crown jewel and it targets Prostate cancer which is the second most common cancer affecting men in the U.S. and one of the leading causes of cancer-related death.

A couple of years ago, Dendreon was in the exact same spot it is in now and back then I talked about the risk and rewards of playing these types of events. I profiled both call and put options that made 500% moves in a matter of days. On 3/28/07, the stock was halted on a Wednesday at $5.22 and did not open until Friday. When the stock did open, it was at $17.92 but finished the day at $12.

The April 5 calls were trading at $1.25 on that Wednesday. Guess where they OPENED on Friday morning? $12.60. The calls eventually closed around $8 for a 500% gain in less than two days.

Dendreon would make it to a high of $25 by 4/10/07 but was back down to $5 a month later after Provenge did not get FDA approval. Dendreon’s shares were rising and falling that fast as the debate about whether or not Provenge would get FDA approval.

The reason for the rapid rise and sudden fall was due to the FDA panel saying Provenge is safe, and that there was “substantial evidence” that it works in treating advanced prostate cancer. In other words, traders were taking the panel’s word as a sign the drug was going to get approved but the FDA does not have to follow the panel’s recommendation. At the time, the panel had said that the drug needed further study before it can be approved, but voted “Yes” by a 13-to-4 margin. That is what pushed the stock from $5 to $25. When the FDA denied approval, Dendreon shares tanked back below $7 on the news.

Fast-forward to today.

Dendreon was expected to submit to the U.S. Food and Drug Administration last year but the application for Provenge has been delayed until now. The good news is that the final results from the study shows that the drug reduces the risk of death by 20%. The company expects the final results of the study to be released in late April.

It’s difficult to value a company’s pipeline, but assuming Provenge could become a breakthrough treatment for patients with advanced prostate cancer, I would guess sales could have the potential to reach $1 billion. Based on this forecast, it is why this stock hit $25 to $30 a share.

Since we aren’t expecting the announcement until late April the first option chain we can look at is the May call options. The one thing I want to show you is how much the options are trading at a premium.

Here is a list of the four closest strike prices for the Dendreon May call options:

May 5 call (UKOEA, $1.92, down $0.03 $0.22) Bid: $1.89, Ask: $1.98
May 7.5 call (OKOEU, $1.56, up $0.01) Bid: $1.45, Ask: $1.52
May 10 call (OKOEB, $1.12, down $0.11) Bid: $1.12, Ask: $1.15
May 12.50 call (OKOEV, $0.86, down $0.10) Bid: $0.86, Ask: $0.90
May 20 call (OKOED, $0.20, down $0.10) Bid: $0.41, Ask: $0.50

Now look at the options for DryShips (DRYS, $4.49, down $0.83). These are June options because the May options have yet to list and there are no June options for Dendreon.

June 5 call (OOCFA, $1.30, down $0.45) Bid:$1.25, Ask: $1.35
June 10 call (OOCFB, $0.35, down $0.25) Bid:$0.35, Ask $0.45
June 20 call (OOCFD, $0.10, unchanged) Bid: $0.05, Ask $0.10

The June options are even further out then the May options and both stocks are under $5. Yet, notice the huge price difference in the both the 10 and 20 call options prices.
So here is the bottom line. If you believe history has a chance to repeat itself and Dendreon will trade from $5 to $25, how do you play it?

The May 5 calls are going for $2.25. Let’s say the stock hits $15 before $20. For $2,250 you could buy 10 call options. If Dendreon hits $15, the investment is worth at least $10,000 because the options would be in-the-money by $10. If the stock hits $20, you’re at $15,000.

The May 10 calls are selling for $1.30. For $2,600 you could buy 20 call options. If the shares are at $15 that gives the options a $5 in-the-money profit and you would net you $10,000. If the stock is at $20, you’re at $20,000.

There’s more bang for the buck with the 10’s but if Dendreon doesn’t mirror the move that the stock made two years ago, there is also the chance of a bigger loss.

You could buy half of each if you really wanted to and you can play around with the figures on the other strike prices to see what you get. In fact, if any of you need help figuring out where an option will trade when a stock hits a certain price, email me.

As you can see, there are a lot of ways to play this so figure out what suits you.

Either way, expect more volatility in the coming weeks as Dendreon moves closer to its expected FDA ruling. The average daily volume is around 2 million shares and on March 13, the stock traded 8 million shares after its earnings release.

Two years ago volume approached 93 million shares that Friday which was more than the 76 million shares the company had outstanding at the time.

The 52-week high for Dendreon is $10 and I would expect that we go higher than that if the drug is approved. This is a high risk trade with the chance of either hitting it big or losing much of the capital you put up if the drug is NOT approved.

Of course, I’ve been mentioning buying 10 contracts of the May 10 call options but here is one instance where even a $130 could turn into $500. It’s like getting 5-to-1, or 10-1 on your money on something that looks pretty positive. There will be no stops for these positions.” –

Update: On Friday, I did some more research and decided to put my money where my mouth is. I bought 7 contracts of the Dendreon April 10 calls (UKODB, $0.35, down $0.10) at 40 cents. I also picked up the 5 of the May 7.50 calls (OKOEU, $1.45, unchanged) for $1.50 each. With commissions the trades cost me a total of $1,060.

I purchased some of the April contracts in case any news starts to leak out early. There was plenty of press two years ago as we got near the end of March and the panel’s recommendation was out before April 15. These were “cheap” out-of-the-money calls and only cost be $300. If Dendreon can get a push like we witnessed 24 months ago and can trade to $15 by April 17 then this position could clear as much as $7,000. If the stock is at $20, these two trades could pull in nearly $14,000. Wow….

Again, this trade isn’t for everyone and I could easily loose $1,000. If Provenge doesn’t get approval or if it does and the stock only rallies to $6 or $8 then I could be taking a bloodbath. However, I’m fully aware of what the outcome is so I don’t mind taking the risk.

From my research, the company needs that 20% extended survival rate number to get to 22% for the drug to get approval. That may not seem like a lot but without getting too technical, it is. That 2% will have many moving parts associated with the results so it isn’t 100% certain we get there.

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4. Earnings

Monday: Focus Media Holding (FMCN, $5.80, up $0.27), Sonic (SONC, $8.53, down $0.10), Tiffany & Company (TIF, $20.23, down $0.54) and Walgreen (WAG, $24.29, up $0.24).

Tuesday: Carnival Corporation & Carnival (CCL, $21.30, down $1.09), Commercial Metals (CMC, $10.62, down $0.94), Deutsche Bank (DB, $37.51, down $1.20), McCormick & Company (MKC, $32.48, up $0.23), Robbins & Myers (RBN, $15.72, down $0.70) and Williams-Sonoma (WSM, $10.55, up $0.15).

Wednesday: CKE Restaurants (CKR, $8.63, up $0.12), Gammon Gold (GRS, $7.88, up $0.14), Paychex (PAYX, $23.03, down $0.12) and Red Hat (RHT, $14.89, down $0.76).

Thursday: Accenture (ACN, $30.20, down $0.33), Best Buy (BBY, $32.30, down $1.28) and ConAgra Foods (CAG, $15.07, up $0.49).

Friday: KB Home (KBH, $11.25, down $0.53).

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5. Current Trades

Amgen (AMGN, $48.62, down $0.62)

April 55 calls (YAADK, $0.45, down $0.05)
Entry Price: 90 cents (2/27/09)
Exit Target: $1.50 (Open)
Return: -50%

March 47.50 puts (EXPIRED)
Entry Price: $1.25 (2/27/09)
Exit Price: $2.50 (3/6/09)
Return: 100%

The April calls got off to a great start for the week as the stock hit a high of $52 on Tuesday. The options were slightly profitable but Amgen fell with the rest of the market. We bought the March 47.50 puts as insurance and got a quick double while maintaining our long position. We could continue to ride the trade but it will start to eat away at the profits we made on the March puts if Amgen falls back to $45. Set stops at 30 cents.

Bank of America (BAC, $6.19, down $0.74)

The May 6 calls (BYOEF, $1.70, down $0.50)
Entry Price: 75 cents (3/11/09)
Exit Price: $2.75 (3/18/09)
Return: 267%

July 10 calls (JLWGB, $0.60, down $0.25)
Entry Price: 30 cents (3/11/09)
Exit Price: 95 cents (3/18/09)
Return: 217%

I talked about the financial stocks getting ahead of themselves and on Wednesday I was pounding the table to keep one foot out the door. These call options got another huge pop on Thursday’s open but deflated quickly afterwards. They are still higher than where they were originally profiled and some of you may still be in the trades. I will keep following them as I assume half positions were left open but set stops at your entry level prices or right above them to protect these monster profits.

IBM (IBM, $92.51, down $0.15)

April 95 calls (IBMDS, $2.90, up $0.10)
Entry Price: $1.20 (3/6/09)
Exit Price: $3.00 (3/16/09)
Return: 150%

IBM was all over the map last week and I mentioned rolling profits from the 95 call options over into the April 100 calls (IBMDT,$1.25, up $0.10). We were faked-out of the trade but IBM hit a high of $95 on Friday and these call options traded as high as $1.70. They were profiled at $1.00-$1.10 but the deal IBM announced to buy Sun Microsystems (JAVA, $8.10, down $0.53) was something I certainly didn’t expect. Either way, I was just glad to put us in position to make some good money with the trades.

Potash (POT, $76.67, down $2.55)

April 100 calls (PYPDT, $0.85, down $0.05)
Entry Price: $1.70 (3/4/09)
Exit Price: $1.25 (3/17/09)
Return: -25%

Potash shares hit a high of over $80 on Thursday and Friday and this position was slightly positive before the stock took a dive in the last few hours of trading. However, we were out on Tuesday when our stop of $1.25 was hit. I had said that the risk for this trade was the news that several potash producers in Russia had dropped potash prices 25% and that caught up to us. The rebound was nice to see but the trade was busted once this news had come out.

As you can see, we are minimizing losses and maximizing gains. The market is still struggling with direction which is why we have tight stops on some of our positions.

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6. Monday Morning Playbook

I’m guessing a few good stories this week could be the earnings report due out from Deutsche Bank on Tuesday and Best Buy on Thursday.

Deutsche will be one of the first major banks to announce earnings and I’m sure it will be used to figure out what the other banks could report. Of course, not all books are alike so there will still be some surprises as well as a few disappointments once their books are opened for the quarter. I’m not sure what to expect from Deutsche but I think we could get a 10% move and possibly 20% in the stock once Pandora’s Box is opened.

I like a strangle option trade for this one and here is what I’m looking at. The stock is right between the 35 and 40 strike prices and a 10% move gets us above or below those two strikes. The April 40 calls (DBDY, $3.00, down $1.30) and the April 35 puts (DBPW, $3.00, up $0.10) would cost about $600 for both which could net a 10% return if the stock moves 8%-10% above or below its current levels.

The April 45 calls (DBDZ, $1.50, down $0.50) and the April 30 puts (DBPV, $1.60, up $0.15) would cost roughly $310 to put on a trade and could be the better play. It’s a little riskier but if the stock moves 20% then it could do really well. I think there’s a good chance of that happening because of how much attention Wall Street will be paying to Deutsche’s earnings but you never know.

I would almost suggest just buying the calls or a 2-to1 ratio but the market appears like it could go either way right now. The last two weeks you could feel the market going higher but that euphoria has weaned as we head into first quarter earnings.

With Best Buy, the stock hit a low of $24 just a couple of weeks ago and is now at $32 and was pushing $34. I’m certain the company is benefiting from the closing of Circuit City Stores (CCTYQ, $0.0085, up $0.001) which became official last Sunday. Yes, that quote means the stock is trading on the pink sheets for under a penny. Best Buy could see as much as a 10% increase in domestic comparable-store sales and the company’s cutting fat and adjusting to the tough times. However, how much were their sales hurt while Circuit City was liquidating? That will be the wildcard.

The April 35 calls (BBYDG, $1.35, down $0.40) were pretty active on Friday as over 5,000 contracts traded hands and might be worth a gamble if they get down to $1.00-$1.25. The company announces earnings before the bell on Thursday. If you are bearish then you could play the downside with the April 30 puts (BBYPF, $1.50, up $0.30) which traded 2,700 contracts.

You could also use these two options together and use it as a strangle trade as well.

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7. Closing Thoughts

The possibility of a “flat” week could be in the cards as were gear up for the start of first quarter earnings which will begin to flow in April. There are a couple of notable companies reporting this week as I mentioned earlier but the market will take a more meaningful look into the ones coming up.

There are a slew of economic reports out this week, Existing Home Sales on Monday; Durable Goods Orders and New Homes Sales on Wednesday.

There is news that broke over the weekend that a new government entity dubbed the Public Investment Corporation is seeking to purchase up to $1 trillion in toxic assets on banks’ books. Our buddy, Treasury Secretary Tim Geithner should be speaking about this on Monday. Dude will be busy this week. On Tuesday, he testifies before the House Financial Services Committee on the government’s rescue of AIG, and on Thursday, the financial market regulations. He has come under attack as of late and he hasn’t been a popular choice thus far so it’s hard to say what impact his words will have on the market. However, you can bet the financial stocks will be moving again this week.

As usual, keep an eye on the trades we have going and don’t be afraid to pull the trigger on both gains and losses. There is always a trade and the ones that nobody is watching are the ones we want to get into next. As we see a rotation of sorts going on from one sector to another, there will be leaders if we can get a renewed rally and there will losers if we eventually test the lows again. The beauty with options is that we can play the market both ways with calls and puts.

If the market can test the upper ranges I talked about earlier, then we will have to see if we can get over the 50-day moving averages once we are there. We saw a slight reversal at the end of last week which means we might have to buy put options if there is a reversal. If we get a break above the 50-day moving averages, then we could run a little higher — much higher if earnings come in better-than-expected. Those are the two catalysts that I am watching right now.

Rick Rouse
Rick@Optionsmentoring.com