Genentech (DNA) lifted by positive Avastin trial

13 02 2008

Genentech (DNA) lifted by positive Avastin trial

Posted by: in Products and Services

Filed under: Good news, Products and services, Genentech Inc (DNA), Options, Technical Analysis

Genentech Inc. (NYSE: DNA) shares are trading higher after the company reported positive preliminary results before market open from a Phase III study of its drug Avastin in advanced breast cancer. Avastin, which is currently approved as a part of a treatment regimen for colon and non-small cell lung cancer, was DNA’s best-selling drug last year. If you think that the company won’t fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DNA.

After hitting a one-year high of $87.74 last February, the stock hit a one-year low of $65.35 in December. DNA opened this morning at $71.70. So far this day the stock has hit a low of $70.60 and a high of $71.90. As of 12:40, DNA is trading at $70.81, up $0.89 (1.2%). The chart for DNA looks neutral and improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider a March bull-put credit spread below the $65 range. A bull-put credit spread is an options position that combines the buy and sale of put options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just five weeks as long as DNA is above $65 at March expiration. Genentech would have to fall by more than 8% before we would begin to lose money.

DNA hasn’t been below $65 at all in the past year and has shown support around $67 recently. This trade could be risky if one of the company’s treatments gets into trouble with the FDA, but even if that happens, this position could be protected by the support the stock might find between $65 and $67, where it bottomed over the past few months.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in DNA.