Somaxon attracts heavy put selling

By David Russell,

Shutterstock photo

Somaxon Pharmaceuticals has been above $2.50 since early 2010, and one trader is betting that will remain true into the New Year.

optionMONSTER's tracking systems detected the sale of 5,000 February 2.50 puts for $0.25 against open interest of 1,387 contracts. The trade pushed total options volume to 14 times greater than average in the heavily shorted drug maker.

SOMX SOMX fell 0.6 percent to $3.29 yesterday and is down 26 percent in the last month. The stock attempted to rally in August after announcing a deal with Procter & Gamble to distribute its Silenor sleeping medicine, but it encountered a flood of call selling.

Since then it has drifted lower, and on Oct. 18 the company said that a rival is attempting to produce a generic version of Silenor, which it plans to oppose in court.

Yesterday's put sale reflects a belief that SOMX will remain above $2.50 through expiration. It took advantage of the microcap's rich implied volatility of about 90 percent, more than twice the stock's propensity to move over the last month.

Traders often sell puts when they think that implied volatility is too high because if volatility drops, option premiums fall as well. (See our Education section)

More than 6,200 contacts changed hands in the name yesterday, 14 times greater than average.

(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: PG , SOMX

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