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July 15, 2014  Tue 9:20 AM CT

TRGT: SEE CHART GET CHAIN FIND STRATEGIES
Put buying tops the option trade in biopharmaceutical company Targacept as shares head lower.

optionMONSTER systems show that 4,075 August 4 puts have been purchased for the ask price of $0.65. This is clearly a new position, as previous open interest in the strike was just 775 contracts.

The puts aren't tied to any trading in the underlying shares identified by our scanners today, but they were very likely bought to hedge a long position in the stock. (See our Education section)

TRGT is down 7.49 percent this morning to $4.08, dropping after the conclusion of a trial on its Alzheimer's drug. The stock is highly volatile, with 10-day historical volatility of 52 percent and average implied volatility of 174 percent.
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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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