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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
Big Blue Misses (IBM), Shares Tumble
Tuesday, July 20th, 2010
9:00am (EST)
The bulls managed to take the market higher on Monday, but they will likely give back all of those gains today and then some. Futures are pointing towards a nasty open after International Business Machines (IBM $129.79, up $1.76) missed on their revenue number.
Yesterday, the Dow Jones added 57 points, or 0.6%, to finish at 10,154. The index traded to a high of 10,187 but ran into resistance which is currently at the 10,200 level. If futures hold and selling pressure picks up then we could see a drop below 10,000 today.
The S&P 500 gained 6 points, or 0.6%, and closed at 1,071 but ran into trouble at the 1,075 level as the index touched a high of 1,074. The next level of support will come in at 1,050 but that will fall if the bears have their way.
The Nasdaq added nearly 20 points, or 0.9%, to settle at 2,198 but once again had trouble with the 2,200 level. The index traded to a high of 2,201 but will could take a huge bath if Tech tanks.
Of course, the big story this morning is IBM’s earnings which were pretty good despite the revenue miss. The company reported a profit of $3.4 billion, or $2.65 a share, versus $3.1 billion, or $2.34 a share, in the year ago period. Analysts were expecting $2.58 a share.
Revenue came in at $23.7 billion, up from $23.3 billion but was below the $24.2 billion Wall Street had factored in. The company said currency changes cut revenue by $500 million in the quarter.
Shares of IBM are down $6.29, to $123.50 in pre-market action. IBM alone will account for over a 40 point loss on the Dow.
Elsewhere, Texas Instruments (TXN, $25.55, up $0.78) also missed on their revenue number despite profits tripling. The company earned $769 million, or $0.62 a share, versus $260 million, or $0.20 a share, a year earlier.
Revenue came in at $3.5 billion while expectations were for $3.52 billion. Although TI provided some decent numbers going forward, shares are getting clipped this morning. In early action, the stock is down $1.45, to $24.10.
As we head towards the opening bell, Dow futures are off by 74 to 9,986 while the S&P 500 futures are down 9 to 1,054. The Nasdaq 100 futures are showing a loss of 17 points and are at 1,789.
This just in, Goldman Sachs (GS, $145.68, down $0.49) missed on their revenue number. Earnings beat Wall Street’s estimates but they fell a little short in some areas of their business. Shares are down $4 in pre-market action.
Tags: call options, Goldman Sachs earnings, GS, how to trade options, IBM, momentum options trading, Momentum stocks, option picks, option stock picks, options alerts, options newsletter, options track record, put options, stock options trading, TXN, volatile options
Posted in Covered Calls, Earnings, Market Commentary | Comments Off