Market News

November 28, 2016  Mon 12:47 PM CT

A large trade is apparently anticipating good news on two fronts from Heron Therapeutics by early next year.

The biotechnology company announced in its earnings report this month that it began commercial sales of its Sustol drug in October, an extended-release injection to treat nausea associated with chemotherapy. In addition, Heron said it will update results from Phase II clinical trials of its HTX-011 post-surgery pain medication in early 2017.

The timing of these announcements could well be the reason that our systems found the following activity in contracts that expire in mid-January:

  • 4,000 January 17.50 calls were bought for $1.50 against open interest of 156 contracts,
  • 4,000 January 22.50 calls sold for $0.35 below open interest of 8,136 contracts.

The trader is either opening a new vertical spread or rolling long calls to a lower strike that is closer to the money. Both scenarios are bullish.

Long calls lock in the price where investors can buy stock, allowing them to profit from a rally with limited capital at risk. Their cheap cost can also generate significant leverage on a percentage basis if shares move in the right direction.

A vertical spread would be looking for HTX to rally above $17.50. The sale of the higher-strike contracts reduces the cost of the long calls but limits potential gains, as the trader will be obligated to sell shares if they rise above $22.50. (See our Education section)

HRTX is down 4.06 percent to $15.35 this afternoon and has fallen 17 percent in the last three months. Shares rose after the quarterly release on Nov. 8 but pulled back a few days later with the rest of the space.

Total option in Heron volume is 12 times its full-session average. Overall calls outnumber puts by a bullish 40-to-1 ratio.

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