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Options Trading News

September 20, 2012  Thu 9:14 AM CT

QCOR: SEE CHART GET CHAIN FIND STRATEGIES

I had a good day trading Questcor Pharmaceuticals yesterday, and it may contain lessons for other investors.

The drug maker got crushed after professional short-selling firm Citron Research reported that Aetna was balking at paying for its high-priced H.P. Acthar Gel. This was at least the second attack by Citron on QCOR, and it drove the shares from Tuesday's close of $50.52 to as low as $22.26--a drop of more than 50 percent!

Selloffs like these often present buying opportunities, so my interest grew as the bloodletting intensified.

Step 1 was to study the long-term chart in search of support levels. Where did I want to get long?

With the stock down around $30, I chose the $24 area because that's where it bounced almost exactly one year ago. It was also resistance throughout May and June of 2011. Originally resistance, then support, it looked like a good place to make a stand.

The next thing I knew, QCOR was below $23 and the shares started to climb. By the time I was able to program my order, I was filled at $24.28. Not perfect, but still less than half its closing price the day before.

Step 2 was to choose my exit price. This time I looked to $34.50, the last major support level from early August.

Step 3 was to choose the best strategy. Instead of simply selling the stock, I wrote the September 30 calls for $5.10 against half my position. That essentially locked in an exit price of $35.10, $0.60 above my expected resistance level. (A little while later, I sold the other half of my shares outright for $33.02, knowing how much I'd hate to lose those gains.)

Selling calls made sense because volatility was spiking and expiration is coming this Friday. That allowed me to profit from other people overpaying for options, and from the natural decline of time value at the end of their lifespan.

Another benefit of selling calls is that, for the remaining QCOR shares I own, my cost basis is now $19.18. (That's the $24.28 entry minus the $5.10 from selling the calls.) If it rallies back to $30 by Friday, I will exit will a gain of almost $11. Below $30, the calls become worthless and I am long shares at a nice discount. I can then dump them outright or sell more calls.

This was one of my better trades this year. I have made plenty of bad ones, but in this case I thought readers would find it informative to see how I used both chart levels and options to slant the playing field in my favor.

QCOR closed at $26.35, down 48 percent.

Disclosure: I own a covered call in QCOR.

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