8:00pm (EST)
Cisco Systems (CSCO, $18.72, up $0.80) had a super day as it added nearly 5% and closed near its high on Monday. I had talked about buying the stock and writing a covered call against the shares in the Weekly Wrap which would have lowered your cost basis.
The stock opened at $18.15 and if you waited a little after the opening bell, it fell to a low of $18.06. Let’s say you got in at $18.15. A 100 shares would have cost $1,815 and if you had sold one July 19 call (CYQGA, $0.88, up $0.30) you would have received about $65 as the calls opened at 61 cents.
This lowers your cost basis in the stock to $1,750 ($1,815 – $65) but you are now obligated to sell the stock at $19 if the option is exercised by July 17th. In other words, your gains are capped should Cisco run past $20.
Still, if the stock is “called” away from you at $19 your profit would be 9% for 2 months (or sooner) worth of work. The good news is that the option wouldn’t be called away immediately unless the stock hits $19.65 which is the other guy’s breakeven point. However, if the stock is at $19.10 or anything over $19, realize the option can be exercised at any time.
One of the disadvantages of doing this strategy is if Cisco runs to $22 then the July 19 calls would be worth at least $3 which would have been a 200% profit if you had just bought the call options straight-up.
Tech started off the week hot and if Cisco sneezes it might break $19 this week…
Rick Rouse
Rick@OptionsMentoring.com
Tuesday's Tidbits
Tuesday, July 7th, 2009
11:00am (EST)
To no surprise, the market is trending lower this morning as all three major indexes are off by about 1%. The Dow is currently down 68 points to 8,256 while the S&P 500 is down 7 to 891. I normally do a pre-market Blog but today I wanted to wait until after the open to do my first one. Reason being…because I wanted to see where Dendreon (DNDN, $24.18, down $0.30) opened at this morning instead of updating you this afternoon.
For those of you new to the Blog, Dendreon is a stock I have been following for years and it was the biggest trade I have profiled this year, if not ever. Back in March, when the stock was under $5, I did a Blog titled “Is Dendreon Headed for Double Digits?
As they say, the rest is history.
Not much has happened with the Dendreon since its big run but over the past few months as the stock has been consolidating. A few weeks ago, shares did manage to make a run at its 52-week high of $27 but quickly fell back once we hit resistance.
Yesterday, the stock gained 4% after an analyst gave the stock a $50 price target and this morning the stock was up in pre-market trading.
You can read countless articles here on the Blog by typing in Dendreon in the search box so I won’t rehash all of the details on why I love this stock. The call from $4 to $20 was an easy one because I knew the history behind the story and told you to keep buying the stock at $5-$6 even when the famous Jim Cramer keep saying “sell, sell, sell”.
The problem was that Cramer didn’t understand the story and still doesn’t. Simply put, people are forgetting that Provenge, Dendreon’s cancer drug, is just the first step in what could be many more cancer cures to come from the company.
There’s no doubt in my mind that Dendreon is still headed for greener pastures and could very well end up being a triple-digit stock in the years ahead. That, or it is a likely buyout candidate. Where it gets tricky with options is figuring out which ones to use.
I was looking for a “breakout” when Dendreon was testing it 52-week high but we didn’t get it. We know news is coming out when Dendreon does get approval FDA approval which should be in the fourth quarter. And we know the stock is going to move BEFORE that news comes out.
So how do you play it and how do you take advantage of Dendreon’s next move?
Buy the stock.
Yes, I know we are an options newsletter but sometimes there are situations where buying the stock is sometimes the safer play. If you buy the stock you have the luxury of WAITING for the stock to go up. With options, time is working against you. However, that doesn’t mean you can’t do both. A covered call is when you buy stock and sell call options against it.
For every 100 shares of Dendreon you buy today, there are numerous ways to write options against those shares. This lowers your cost basis but also caps your gains.
If you don’t want to buy the stock and believe Dendreon is a $50 or $100 stock then you could buy a LEAP option on the stock. If you look at the option chain for Dendreon, you will see call options listed as far out as January 2011. That is 18 months away, folks.
The chain has options all the way up to a January 2011 75 (ORGAO, $0.96, unchanged) strike price. Simple math means these call options would be worth $25 if Dendreon is at $100 by January 21, 2011. So, if you bought just one contract for $100 and the stock is at $100, you will make $2,500. Not bad, huh? The risk here is that the stock doesn’t get to $100 or a buyout comes in under $75 which is the strike price.
The January 2010 50 calls (UQBAJ, $0.47, up $0.07) are trading for under 50 cents. If you think Dendreon is headed to $50, or $55, then these call options could also do well. If the stock is at $55 by the end of 2009 then these calls will be worth $5 or 10x more than their current value.
Bottom line: I’d buy the STOCK RIGHT NOW and maybe one or two contracts of the aforementioned options. However, once Dendreon heats up and finally breaks its 52-week high, we could get more aggressive. Keep the August 30 calls (UQBHC, $0.75, unchanged) on your Watch List in case the stock does make a run but DO NOT buy them until we see the move. You can also use these if you want to do a covered call trade.
Rick@MomentumOptionsTrading.com
Tags: Dendreon
Posted in Company Commentary, Covered Calls, Option Trades | No Comments »