This short story is actually a long sorted story. So sorted, in fact it reminds me of the stories from the Middle East, where persons in one country would set off a bomb, in their own country and blame their neighboring country to keep their militant cause alive.
Dendreon (NASDAQ:DNDN) has about 82 million shares.
Institutions own 27 million shares.
Passionate long time share holders hold 25 million shares.
This leaves about 30 million shares for trading. Or does it?
From March 30th to April 9th, Dendreon is on a tear. Volume was 315 million shares, over six (6) trading days. Shares, were up eleven days straight, from a low of $3.70 on March 21st to a high of $23.58 on April 9, 2007.
Let’s imagine that I am a large hedge fund or brokerage. I know a lot of people are looking for more gains in Dendreon, but with proper incentives (Greed to Fear) I can get them to sell. We all know a former hedge fund manager with a TV show who says, “…hedge funds have so many ways to win…”
So on April 10th, when Dendreon hit $25.25, I put my plan into action. I sell about 8 million shares within 15 minutes (this actually happened between 10:40-10:55 am), and started a downward spiral. My plan is to sell additional large blocks of shares over the next 7 trading days until I drive the price down to $15.00. Maybe, I can set off a few bombshell stories to create doubts about approval.
All the while, I am purchasing enough call options to cover all the outstanding stock that I am selling short while I am driving their prices down. The plausibility of this short story is supported by the table below that shows short interest through April 10, 2007.
This is where it gets interesting. I will use Tuesday’s stock and option activity to further illustrate my point.
On Tuesday over 100,000 May call contracts were purchased at various strike prices. A lot of those went down in value as prices went down. I will buy some of them as protection and to make a nice profit when the stock prices move back up. How many long calls can I buy with the proceeds of my short sale?
I will also sell put contracts and collect the premiums. For example, I could have sold the May 12.50 puts for $3.00 and change. This obligates me to buy the Dendreon stock at $12.50 that I sold this morning for $20.00, which I have to buy back any way.
This is the cake. I get paid to buy back something I have to buy any way, and at a lower price than I sold it.
Now the icing on the cake: I have built a huge, mega, super sized call position with all the profits. I made huge profits when I sold Dendreon in the $20’s and sold puts at $10, $12.50, and $15 strike prices and then bought the stock back in the teens and kept the premium from the put sales.
I also purchased massive number of call options when those prices went down with those profits. When Dendreon’s Provenge gets approved, I have enough call options to buy the whole company by exercising my options. Yes, there are enough open call options that, if exercised would exhaust all shares.
Okay, maybe I don’t buy the company; I just make a couple of dollars.
Have you seen all the profits generated in Wall Street by firms claiming to use, “proprietary trading methods”. Proprietary trading methods seem to involve trading shares not in existence. It also seems that proprietary trading methods are just a way to move your money from Main Street to Wall Street.
Remember Eddie Murphy playing Billy Ray Valentine in, “Trading Places”, and the Duke Brothers explain, “…now the great thing is we make money even when clients lose money…”. Dendreon has traded over 840,000,000 shares in the last 26 trading days!
So here is the question: Am I (the large hedge fund or brokerage above) short or long?
I think the answer is yes.