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Volatility seller sets sights on Chelsea

Chelsea Therapeutics has been milling sideways for most of the year, but news about the drug developer is starting to get interesting.

On Nov. 17, the Food and Drug Administration approved the company's request to conduct a priority review of Chelsea's Northera drug, used to treat dizzy spells. The company also made a presentation at Piper Jaffray's 23rd Annual Healthcare Conference on Wednesday.

CHTP has climbed in the last three sessions on strong volume, potentially suggesting activity by large investors. The stock rose another 4.42 percent yesterday to close at $5.43.

optionMONSTER's tracking programs detected the sale of more than 2,000 January 5 puts, most of which priced for $0.60, against open interest of a single contract in the strike. If CHTP remains above $5 through expiration, the puts will expire worthless and the investor will get to keep the premium.

One of the more noteworthy aspects of the trade is the way that it exploits high option premiums in the name. Chelsea's 92 percent implied volatility compares with realized volatility of just 59 percent, suggesting that the options are pricing in too much of a move. (See our Education section)

The investor may also be trying to time the news, writing puts that will expire about two months before the FDA's scheduled decision on March 28. (See Chris McKhann's column this week for more on how selling puts can be a highly successful strategy despite common trepidation.)

Overall option volume in CHTP was more than 20 times greater than average in the session.

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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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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