Trader sees top in Questcor Pharma

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Questcor Pharmaceuticals ripped higher on strong revenue this week, and one trader is calling the top.

optionMONSTER's monitoring systems detected the sale of 5,000 September 12.50 calls, mostly for $0.45, against open interest of 36 contracts. The trade pushed total options volume in the high-flying drug maker to 13 times greater than average.

QCOR Chart QCOR is up 2.22 percent to $11.50 in early afternoon trading and has risen more than 140 percent this year. The stock has been exploding higher on strong growth of its Acthar multiple sclerosis drug. Wednesday afternoon it reported second-quarter revenue of 28.3 million, beating the $27.50 million estimate.

Earnings missed analyst forecasts, but that apparently resulted from higher sales-force costs--a development investors are likely to forgive in a company expected to grow revenue 29 percent this year. The stock popped 24 percent the next day.

QCOR is now halting its advance around the same $11.60 level where it peaked in June. Some trades may now view that price area as resistance and expect the shares to advance only slightly or head lower in the near term.

Selling calls allows shareholders to earn income from that expectation. If the stock rallies past $12.50, they would have to sell the shares for that price. However, when you count the premium earned from selling the calls, their exit price would really be $12.95.

If QCOR does pull back, they would simply keep the premium and use it to reduce their cost basis. The strategy is one of the most common uses of options as a portfolio-management tool. (See our Education section)

The trade also let the investor exploit the stock's rich implied volatility, which is now about 55 percent--higher than realized volatility has been in the name for the last several months.

(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.

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This article appears in: Investing , Options

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