Option Bulls Target Inhibitex Before Buyout

Inhibitex went on a crazy run last year, and the bulls looked for even more upside last week.

They won't be disappointed this morning because the drug developer agreed to be purchased by Bristol-Myers Squibb for $26 a share in cash late Saturday. That's a premium of more than 160 percent.

OptionMonster's tracking programs had detected the purchase of 2,050 February 10 calls for $2 and the sale of an equal number of February 15 calls for $0.65. That gives buyers the right to own shares for $10 and obligates them to sell for $15. They paid $1.35 for that $5 spread, which will translate into a profit of about 270 percent.

Because they lock in the price investors must pay to own a stock, long calls can deliver major leverage if shares move in the correct direction. The downside is that, unlike owning common equity, they can expire worthless if there is no rally.

Inhibitex rose 2.49 percent to $9.87 on Friday. It started November trading around $4, then leapt as high as $16 by early December after the company announced positive results for its INX-189 hepatitis C drug.

Overall option volume was more than quadruple the daily average on Friday, with calls outnumbering puts by a bullish 12-to-1 ratio.

—Russell has no positions in INHX.

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David Russell is a reporter and writer for OptionMonster.