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August 22, 2013  Thu 3:47 AM CT

XNPT: SEE CHART GET CHAIN FIND STRATEGIES
XenoPort has been falling for the last month, but one trader is looking for the drug developer to rebound in coming weeks.

optionMONSTER's Heat Seeker system detected the purchase of 1,500 September 4 calls in one print for the ask price of $0.95 on a wide bid/ask spread. This is clearly a new position, as open interest in the strike was a mere 6 contracts before the trade appeared.

The calls, which lock in the price where the stock can be purchased, are looking for XNPT to rally above $4.95 in the next month. But these options will track the share price closely because they are in the money and will lose value quickly if the stock doesn't move soon. (See our Education section)

XNPT rose 3.16 percent to $4.57 yesterday despite the broad market selloff. The biopharmaceutical company had been declining sharply since late July and saw losses accelerate after second-quarter results on Aug. 6, but it has been climbing week. The stock, which traded well above $60 at its zenith in early 2008, fell to all-time lows under $4 at the end of 2011.

Total option volume in the name was 2,735 contracts yesterday, far above its daily average of just 168 in the last month. Only 105 puts traded in the entire session, a further indication of the day's bullish sentiment.
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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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