option strategy needed on FDA approval drug stock

1

123golfer

This is my first post so bear with me. I am following a stock (DNDN) that is in phase III trials with the FDA for treating late stage prostate cancer. The decision date looks to be April 30th. The same situation with the same drug occured in 2007. The stock went from less than $5 to $25 in less than 2 weeks. The ruling went against the drug and the stock was crushed. It looks like the ruling was driven by vested interests and lawsuits were filed. Institutions and mutual funds hold 40% of the shares.
I have purchsed May 5 calls and May $7.5 calls. If history repeats there is a huge payday even pre-approval but of course it is never that easy. I am betting on a huge price swing driven by Greed not the approval. If that happens even better!

The problem is that the price of the stock is down to $2.60 and there are almost 35,000 May 2.5 put contracts in open interest. Could this be a hedging strategy by the institutions with large holdings?? What can I do to protect my position??
 
With all due respect, you should have asked the question before placing the trade. At this point, I probably wouldn't do anything. Wait for your "pop"--if it comes and get out of the calls immediately. Your downside is limited anyway. If the 'pop" doesn't happen, then immediately sell your calls so that you can at least recover some lost premium. Then forget about this trade and look for the next one--also learn from this trade as well.
 
Hello


Thank you for your input. My $7.50 calls are the same price so I would be out commisions only. My $5 calls are down 17%. The premiums seem to be holding up well in spite of a declining price.


I may hold for a while - I still have 11 weeks.
 
Quote from 123golfer:

The problem is that the price of the stock is down to $2.60 and there are almost 35,000 May 2.5 put contracts in open interest. Could this be a hedging strategy by the institutions with large holdings?? What can I do to protect my position??
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There's no way to know if those May 2.5 puts are someone betting on the stock dropping, hedging their stock or using them as part of a larger option strategy. And even if you could know, what good would it do you? It would have no relevance to the FDA's decision.

As you've seen before, the problem with events like these are that they're generally hit or miss. It's a lottery ticket that usually, doesn't have much middle ground. You can protect your position by converting some or all of your long calls to spreads but that gives up the upside.

When I've ventured into FDA approvals in the past, I waited for the news release and then tried to get on board the direction of the momentum as well as looking for a possible reversal after the likely overshoot. You have to be nimble and you while you don't get a lottery event, you don't get wiped out either.
 
Dumbest biotech trade of the year if you are long - But Visium & Perceptive have bought calls and puts per their usual 13F filings... they are probably hedging with the stock.

http://www.sec.gov/Archives/edgar/data/1377452/000119312509028258/d13fhr.txt

http://www.sec.gov/Archives/edgar/data/1224962/000090901209000419/t305100.txt

In most cases, they have a short position not shown and the calls are to hedge any possible move to the upside.

Bridger Management has a $5 million call position as of Dec. 31st filing as well.

http://www.sec.gov/Archives/edgar/data/1166309/000119312509028212/d13fhr.txt

When DNDN tanked after the nasty move up in 2007, SAC had a $10 million put position that they likely entered into as the stock moved up. Look at the old filing.

Good luck, you'll need it
 
Drug approval trades IMHO are a "roll the dice" trade setup - the premium is so high on the options it costs a lot to put the trade on (usually) and if you lose, you lose big quickly.

IMHO drug approvals are a volatility play where either you pay thru the nose for a long vol play (straddle/strangle) via debit or you do a credit spread (ie short butterfly) for a smaller credit. Or you just buy calls/puts and roll the dice, hoping to bail out of a losing position w/o losing all your premium. :)

Funny you speak of DNDN - that was a favorite stock for *many* folks a few years ago, myself included. Back in 2007 I did a speculative "roll the dice" trade on DNDN - I bought a ton of 5-strike calls the week before the FDA decision on Provenge for 90 cents. Sold 'em at various points the day after the decision was announced for an average of around $12. Best speculative option trade I ever made, to be sure, and more than made up for a few that went against me over the years.
 
If the stock goes down on the news the premium will be out of the calls you own before you could sell them. If the stock rallied you'll need to be quick to sell also as volatility will get crushed. You need a couple hundred % move
 
LOL--I also have a funny story re FDA drug approval. I forgot the name of the company, but it was looking for FDA approval of a prostate cancer drug. The announcement was scheduled for a Friday. So on Tuesday, I sold OTM puts. On Friday, the FDA denied the application--after hours. Of course, everyone owning the stock stewed over the weekend. And, of course, come Monday at the open, the stock gapped down below my strike. And, for the first time in my life, I received a margin call and had to liquidate. This was about 10 years ago when your broker actually picked up the phone to tell you about your margin call. Since then, I was done with FDA approval gambles.
 
Quote from psytrade:

Dumbest biotech trade of the year if you are long - But Visium & Perceptive have bought calls and puts per their usual 13F filings... they are probably hedging with the stock.

http://www.sec.gov/Archives/edgar/data/1377452/000119312509028258/d13fhr.txt

http://www.sec.gov/Archives/edgar/data/1224962/000090901209000419/t305100.txt

In most cases, they have a short position not shown and the calls are to hedge any possible move to the upside.

Bridger Management has a $5 million call position as of Dec. 31st filing as well.

http://www.sec.gov/Archives/edgar/data/1166309/000119312509028212/d13fhr.txt

When DNDN tanked after the nasty move up in 2007, SAC had a $10 million put position that they likely entered into as the stock moved up. Look at the old filing.

Good luck, you'll need it
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Thank you for an unvarnished assesment and your research - I am long.


Note to myself: Do not submit MENSA application.
 
Quote from rickf:

Drug approval trades IMHO are a "roll the dice" trade setup - the premium is so high on the options it costs a lot to put the trade on (usually) and if you lose, you lose big quickly.

IMHO drug approvals are a volatility play where either you pay thru the nose for a long vol play (straddle/strangle) via debit or you do a credit spread (ie short butterfly) for a smaller credit. Or you just buy calls/puts and roll the dice, hoping to bail out of a losing position w/o losing all your premium. :)

Funny you speak of DNDN - that was a favorite stock for *many* folks a few years ago, myself included. Back in 2007 I did a speculative "roll the dice" trade on DNDN - I bought a ton of 5-strike calls the week before the FDA decision on Provenge for 90 cents. Sold 'em at various points the day after the decision was announced for an average of around $12. Best speculative option trade I ever made, to be sure, and more than made up for a few that went against me over the years.
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Hello

Good for you - I did not do so well. You may want to try this trade again - DNDN is up 17% today on heavy volume. It is similar to 2007 - lots of interest both long and short.

I have no idea if the drug will be approved but I think there will be lots of trading opportunities in the next few weeks on both sides.
 
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