By the way, for those interested in DNDN's covered calls, the calls have equally high premiums as the puts. The May puts that are $7.25 out of the money sport a $2.00 premium. The May calls that are $7.75 out of the money sport a $2.30 premium. I just happen to believe that the puts are the better risk/reward play.
And the reason for the high premiums on the May puts may be that the panel's recommendations aren't binding.
Though the stock has been stabilizing a bit in the last couple of days, it has been extremely volatile. That's certainly one of the reasons for the high option premiums. On April 30, which was the day after the advisory committee made its favorable recommendations, the trading volume of the stock exceeded the size of the float. Since then, there have been many days that trading volume was 50% or more of the float, a virtual haven for day traders.
It's definite that the recommendations aren't binding. Out of the last 38 times, apparently the recs have been ignored once.
The FDA has indicated that they plan on making a final ruling by mid May. So it's a flip of the coin.
A coin has only two sides, so there are better analogies. I just can't think of them. :)
Seriously, the FDA has about four options. They range from immediate and unqualified approval to sell the drug to outright forbidding its sale, with a couple of options in between the two extremes. I think the greatest likelihood by far is that the drug will be approved for immediate sale with the qualification that testing must continue to determine whether the drug actually works.
If the FDA approves the drug, the stock will soar, and if they don't (or delay a ruling), the stock will crash.
Immediately following news of the advisory committee's votes, the stock gapped up from less than $4 to $18. The following day it got as high as $24 or $25. That's a 6-bagger. I'm reasonably confident that a favorable ruling from the FDA will not propel the stock nearly that high from the current level of $17. But I do expect the stock to get back to $25 at a minimum and won't be surprised if it gets to $40 in the very short term. All of that depends partly on how favorable the ruling is, if indeed it is favorable at all.
Assuming an unfavorable ruling, I definitely expect the stock to crash. Depending on how unfavorable it is, I think it could get to at least $8 and maybe even as low as $4. But as I mentioned above, I think some sort of favorable ruling is far more likely than some sort of unfavorable ruling. That's why I sold the puts.
I have no idea how the stock price will be affected by a delay in the ruling. Similarly, for those who believe the FDA will rule on May 15 as opposed to by May 15, I have no idea how the stock will move in the days immediately prior to D Day. The only thing I know is that prior to D Day I plan to have closed my positions in the puts I've sold.
Feeling lucky?
Very.
I bought the stock at less than $4 and sold it 8 trading days later at $18. That's luck! If it were skill, I wouldn't be qualified to participate in the dummy thread. Goodness knows I'm well qualified.
--Mike Buckley |
