Bull hopes to ride rebound in Questcor

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One bull is using options to get long Questcor Pharmaceuticals following a giant selloff this week.

Our Heat Seeker tracking system shows the purchase of 4,209 October 35 calls for $2.40 and the sale of an equal number of October 40 calls for $0.80. Volume exceeded open interest at both strikes, indicating a new position was implemented.

The trade resulted in a cost of $1.60 and will earn a maximum profit of 213 percent if the drug maker closes at or above $40 on expiration.

QCOR is up 6.33 percent to $32.25 in early afternoon trading. It started the week above $50, but plunged below $25 on Wednesday after short sellers at Citron Research raised questions about whether health insurers will pay for its expensive H.P. Acthar drug. Management issued a statement downplaying the allegations, and the stock has been fighting its way back since.

All the volatility has driven up option premiums, so it would be very expensive to buy the October calls outright. Selling the upside contracts reduced the cost and lowers the level at which the trade becomes profitable. (See our Education section for more on the strategy, known as a vertical spread .)

Overall option volume is more than twice the daily average in QCOR so far today, with calls outnumbering puts by almost 2 to 1.

Disclosure: I own a covered call in QCOR.

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

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