I posted about would-be drug maker Dendreon (DNDN) on April 9 and April 22 of this year, noting a strong price spike above $25 and how a CallWriter member creamed it writing naked calls. Premium was so high and the stock moving due to possibly favorable news coming on its Provenge drug in development. I speculated that the stock would not hold price and pointed DNDN out as a bad covered call play, but a good short, puts being too expensive. Well, the Provenge news was not good and DNDN ultimately gapped down to $8 on bad news and still is under $8 a month later.

It was bid on June 15th at $7.25 and offered at $8.50; ye gods, what a spread. It’s 2006 revenues wouldn’t throw a proper party for Donald Trump. What’s there to like? I don’t claim any special prescience in this case; my crystal ball is no better than yours. But DNDN is an unprofitable company whose future depends on a drug in development. For those who wonder why I avoid pharmaceuticals, look no further than DNDN. Even protective puts make such companies dicey for covered call plays.

When premium gets unusually high on a company (implying higher-than-normal volatility in the future) whose stock is not moving, it is because the market expects price movement to occur. And that expectation is based upon an event. If the company is a pharma, or worse, a small pharma, you had better know what that news is. Smokin’ high premium on a stock like DNDN is the rattler’s rattle.

DNDN was not a bad play, mind; only bad for covered calls and any long-stock play. Bearish positions won like crazy. This is the kind of stock the covered call writer must avoid at all costs.

This entry was posted on Sunday, June 17th, 2007 at 12:22 am and is filed under Covered Calls. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.