Strategy aims to leverage Questcor

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One investor is using an unusual strategy to get long Questcor Pharmaceuticals.

optionMONSTER's Heat Seeker tracking system detected the purchase of 2,581 July 42 calls for $3.80 and the sale of 3,872 July 50 calls for $1.45. Volume was more than triple open interest at both strikes.

The trade resulted in a cost of about $419,000, or $1.62 per call contract purchased. It will earn a maximum profit of 394 percent if QCOR closes at $50 on expiration--about $4 more than the stock's all-time high. Gains will erode above $50 and eventually turn to losses because of the greater number of calls sold short.

The strategy is a variation of a ratio spread , where more contracts are sold further from the money than are bought closer to the money . That increases leverage because it reduces cost, but it also creates the possibility of loss if the stock moves too far in the intended direction. (See our Education section)

QCOR is up 1 percent to $38.29 in midday trading. The drug maker has almost tripled in the last year, riding a wave of strong demand for its Acthar drug, which is used to treat ailments including multiple sclerosis, infantile spasms, and nephritic syndrome.

It has beaten estimates at least the last three times it reported earnings. The stock recently pulled back to its 200-day moving average, but shares have rebounded and are now attempting to continue higher.

Overall option volume is slightly above average, with calls outnumbering puts by 8 to 1, according to the Heat Seeker.




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

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


This article appears in: Investing , Options

Referenced Stocks: QCOR

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