dndn opts - apwr; apwr ; apwr; apwr; apwr

Steven Smith
Dendreon Options
7/23/2008 10:05 AM EDT
Hey Adam, I was waiting for trading to open before replying. You certainly have the first part right that the November calls are extremely active, the volume leader is the November $7.50 call which is trading hands at around $2.20 giving it an implied volatility of around 180%. This suggests the options market is expecting a 50% price move by the November expiration.

This compares to the August and September options, none of which have traded over 450 contracts, and are carrying an IV in the 110% range suggesting about a 30% price move within those time frames.

One way to play this might be to create a variation on a covered call. Buy the stock, which is currently trading around and sell vertical call spreads. For example, with the stock trading around $6.20 one can sell the August $7.50 call for around $2.20 and buy the August $10.00 call for $1.50 or a net credit of 70 cents. This will reduce your cost basis to $5.50 a share.

But the real key here because you are selling a vertical spread, rather than standard covered call which caps profits, upside profit potential remains unlimited once the stock crosses above the $10 strike price.

Position: none