Targacept has been exiled to the woodshed, but yesterday the buyers came back in force.
OptionMonster's systems detected the purchase of 4,000 May 10 calls for $1.80 and the sale of 4,000 May 17.50 calls for $0.80.
Buying callsentitles investors to purchase the stock at the strike price, while selling calls obligates them to sell shares at the strike price. So yesterday's trade essentially locked in the right to collect $7.50 in return for the $1 outlay. That's a 650 percent return if Targacept closes at or above $17.50 on expiration.
Later in the session, traders repeated the strategy at higher prices, this time buying 5,000 May 17.50s and selling 5,000 May 30s. That has the potential to earn more than 1,400 percent if the developer of nerve drugs goes back to its old peak of $30.
Targacept is still far below that level, closing yesterday up 4.14 percent to $7.79. It's been falling since spring, initially following the broader market lower and then suffering an additional setback in early November when its TC-5214 compound failed to meet primary benchmarks in a Phase 3 study.
But more data are still expected on the product, and yesterday's traders are apparently wagering that the news will get better and lead the way to a major comeback in the stock. If they're wrong they will probably lose their premiums, but the trades are a much less expensive way to play a rebound than buying shares directly.
Overall option volume in the name was more than 12 times greater than average in the session. Calls outnumbered puts by a bullish 40 to 1.
—Russell has no positions in TRGT.
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David Russell is a reporter and writer for OptionMonster.