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February 26, 2013  Tue 4:14 AM CT

ALKS: SEE CHART GET CHAIN FIND STRATEGIES
Alkermes has pulled back from a seven-year high reached at the end of last month, but traders are betting that the drug developer will rally in the next few months.

More than 1,600 May 24 calls were purchased for $0.35 in 15 minutes yesterday morning, according to optionMONSTER's Heat Seeker system. The volume was more than 2.5 times higher than the strike's open interest before the session began, indicating that this is fresh buying.

ALKS fell 2.16 percent yesterday to close at $20.36. The stock spiked to $23.36--its highest level since March 2006--on Jan. 31 after its last earnings report, but it gapped lower the next day after announcing a secondary stock offering.

Yesterday's long calls are looking for ALKS to gain roughly 20 percent by mid-May. These options could be sold at a profit earlier if their value rises with any rally before then, but they can expire worthless if shares remain below the $24 strike price. (See our Education section)

The Irish biopharmaceutical company presented at the Citi Global Healthcare Conference yesterday. It is to present at the RBC Capital Markets' Healthcare Conference tomorrow morning and at the Cowen Health Care Conference on March 4.

Total option volume in the name was 2,148 contracts yesterday, more than 6 times its daily average of 335 for the last month. Only 22 puts changed hands in the session, a reflection of the bullish sentiment.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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