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Traders are betting big on Valeant and Square before earnings next week

  • Options traders are betting Square and Valeant will pop on earnings.
  • There is heavy options buying of Valeant November 13.50 calls, according to Jon Najarian.
  • Square December 38 calls also are being heavily bought.
  • Najarian scored winning trades in L Brands and Pioneer Natural Resources this week.

Next week will be another busy week for stocks with a slew of companies set to report earnings.

Investors are making big bets on two key names, and they're using options to play the upside potential.

This week bulls bought calls in shares of both Square and Valeant. They believe the stocks will surge after Valeant's quarterly report Tuesday and Square's report a day later. A call option is a contract for the right to buy a stock at a specified price in the future. Purchasing call options is typically a bullish bet.

However, if the stock doesn't pass the call's strike price, the investors are only out the price they paid for the option — a fraction of what it would cost to own the stock.

Joseph Papa, CEO of Valeant
Ashlee Espinal | CNBC
Joseph Papa, CEO of Valeant

Investors are betting that Valeant will push through the $13.50 level when it reports earnings next Tuesday before the bell. They bought more than 4,500 calls at the $13.50 strike price with a Nov. 10 expiration date.

Najarian Family Office co-founder and "Halftime Report" trader Jon Najarian bought Valeant calls after seeing the heavy options activity in the name. He speculated the bullish bet might be investor anticipation of "positive guidance" or "joint ventures." He also noted due to the value of businesses within Valeant, bulls believe "an announcement of some sort of spinoff" could be imminent.

The embattled drugmaker has been under significant pressure in the last few years after a series of missteps, including accounting misstatements and C-suite shakeups. As of Thursday's close, shares were down 42 percent over the past year.

The stock did rally on Friday after the company announced the FDA approved its glaucoma drug.

Mobile-payments processor Square is also set to report earnings next week, and bulls are betting the stock could break above $38.

In the past week investors bought more than 7,000 December 38 calls. The options expire on Dec. 15, so as long as Square's shares are trading above $38 by then investors are set to profit. (Minus the price they paid for the option.)

Square has beaten Wall Street quarterly estimates five straight times and the shares are up more than 200 percent in the last year. The San Francisco-based company currently trades at 151 times forward earnings estimates (per FactSet analyst estimates), and as of Thursday's close had a market cap of $13.843 billion.

Najarian uses options to limit downside when trading quick and short term market moves. Since stocks often jump or drop after earnings, there's often heavy activity around quarterly reports.

Tuesday he spotted heavy call buying in Pioneer Natural Resources ahead of its quarterly report Wednesday. He bought calls. The stock is up more than 4 percent in just a few days.

L Brands popped on Thursday after the company reported a 2 percent rise in comparable store sales for October (the street had been anticipating a 1.7 percent decline). Ahead of the report Najarian spotted unusual activity and bought calls. The stock is up 9 percent since.