The shares of Geron Corporation (NASDAQ: GERN) rocketed sharply higher on Jan. 23, when the Food and Drug Administration (FDA) granted approval for the world's first clinical trial of human stem cells. Now, GERN has collected an impressive year-to-date gain of 57.8%. However, CEO Thomas Okarma isn't feeling too complacent with his stock's respectable rally. He told Reuters Tuesday, "If this were a normal macro environment, our stock would have tripled with this kind of advance."
No doubt, the FDA's timing could have been better, since Okarma says more money is needed for academic stem cell research -- and demands on federal funding have rarely been greater. "There's no question that there are a lot of big fish in the Washington frying pan these days," commented the CEO. He's calling for the establishment of a presidential commission on stem cell policy to keep the industry on Washington's radar.
Despite Okarma's lament about his not-yet-tripled share price, the chief executive isn't ungrateful for his stock's progress. "We're happy with what has happened and we hope we've hit a new floor," he noted. In fact, GERN does seem to be testing a floor near the $7 level. The stock has consolidated its gains atop this region since its initial pop higher, with the $8.50 region capping its upside progress.
After my colleague Rocky White and I recently noted heavy buy-to-open call volume on GERN, a reader named Don wrote in to suggest that traders might be purchasing the bullishly oriented options as a hedge against their short positions. Judging by the simultaneous upswing in short interest on the shares, he definitely makes a compelling case.
Digging into the stats, the number of GERN shares sold short jumped by 83.7% during the most recent reporting period, and now accounts for a healthy 20% of the stock's available float. Meanwhile, call options outnumber puts by four-to-one among options set to expire within three months. In other words, investors are definitely playing both sides of this trade.
In the February series, peak call open interest is docked at the $7.50 strike, narrowly atop the equity's current perch. There are 11,326 contracts at this strike, closely followed by 11,307 contracts at the $10 strike. With this option series set to expire next Friday, GERN could find its ceiling closing in during the next week -- the heavy accumulation of out-of-the-money calls at $7.50 could exert options-related resistance, as the hedges related to these options are gradually unwound. Over the short term, look for the shares to remain range-bound.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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