Genentech (NYSE:DNA) is a biotechnology company that discovers, develops, manufactures and commercializes biotherapeutics for unmet medical needs. The company's primary products are Rituxan anti-CD20 antibody, Herceptin anti-HER2 antibody, Nutropin Depot encapsulated sustained-release growth hormone, Nutropin growth hormone, Protropin growth hormone, Nutropin AQ and Nutropin AQ Pen liquid formulation growth hormone, TNKase single-bolus thrombolytic agent, Activase tissue-plasminogen activator, Cathflo Activase thrombolytic agent, Pulmozyme inhalation solution, Xolair anti-IgE antibody, Raptiva anti-CD11a antibody and Avastin anti-VEGF antibody. It also licenses several additional products to other companies and its product development efforts, including those of collaborative partners, cover a range of medical conditions.
We decided to offer an additional "bullish" position this week, just in case one of the current portfolio plays (PIXR, BDK, SEE) is closed early to limit losses. Since DNA was the culprit in the unexpected Biotech Holdrs (AMEX:BBH) rally, we thought it would be appropriate to earn some "revenge" profits from the upside activity. For those who missed Friday's news, DNA shares jumped nearly 20% after a recent clinical study suggested that the company's cancer drug Avastin was effective in stopping the progression of breast cancer in certain patients. Avastin is already approved for the treatment of colorectal cancer and based on the new data, Genentech said it plans to talk to the FDA about getting Avastin approved for the treatment breast cancer as well. Given the extremely large upward move in DNA's share value, the issue should consolidate in the coming sessions, hopefully allowing traders to achieve the target price for the position. We recommend a minimum credit of $0.40 per contract for the spread.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (conservative - bullish/credit spread):
BUY PUT MAY-55.00 DNA-QK OI=5311 ASK=$0.25
SELL PUT MAY-60.00 DNA-QL OI=2286 BID=$0.55
INITIAL "NET-CREDIT" TARGET = $0.40-$0.45
POTENTIAL PROFIT (X 5 contracts @ $0.40) = $200
MARGIN REQUIREMENT (X 5 contracts) = $2300
RETURN ON INVESTMENT (max) = 8.6%
COST BASIS = $59.60
INITIAL EXIT STRATEGY:
Once the position is open, traders should place a (contingent) order to close the short ($60.00) put options if the stock moves below $62.00. A "net-debit" order of $0.85 - $0.90 to close the spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.