Bearish prescription for Depomed

By David Russell,

Shutterstock photo

Depomed is wavering after a big run, and one trader is positioning for an eventual drop.

optionMONSTER's tracking systems detected the purchase of 2,000 March 5 puts for $1 and the sale of an equal number of December 5 puts for $0.125. Volume was above open interest in both strikes.

DEPO DEPO rose 0.93 percent to $5.40 yesterday. The maker of drug-delivery systems is up 88 percent since Aug. 3, when Pfizer decided not to file a patent-infringement lawsuit against its formulation of the larger company's gabapentin epilepsy medicine. DEPO also reported a surprise profit this month.

Yesterday's option trade is designed to profit from the stock holding above $5 through Dec. 17, then pushing lower. That way the contracts sold short will have expired and the long position in the March puts will remain open.

The strategy is known as a calendar spread because it exploits the different expiration dates of the two options. (See our Education section)

It would also benefit if implied volatility increases over the next three weeks, but only if DEPO manages to remain above $5.

Overall option volume in the thinly traded name was 20 times greater than average in the session.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: DEPO

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