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February 14, 2013  Thu 5:16 AM CT

Shares of Ziopharm Oncology gapped higher this week, and option traders are betting on even larger gains ahead.  

optionMONSTER's Heat Seeker program showed heavy buying in the May 7 calls, including one big block of 3,500 contracts for $0.70. Open interest was a mere 145 contracts coming in today, so someone obviously believes that this $245,000 investment will yield big returns.

Long calls lock in the price investors must pay to buy a stock. They can generate nice leverage in the event of a rally but will expire worthless if the shares climb above the $7 strike price by mid-May. (See our Education section)

Ziopharm began the week as a $4 stock. Now, after a presentation at an industry conference and Phase III trials of Palifosfamide treatment on soft-tissue sarcoma looking extremely positive, shares are closer to $5.

Palifosfamide belongs to a group of chemotherapy drugs called alkylating agents, which halt tumor growth by binding to cancer-cell DNA and interfering with its function. Full results are expected by the end of this quarter.

ZIOP ended yesterday's session up 0.21 percent to $4.70. Calls dominated its option activity, outnumbering puts by a bullish 15-to-1 ratio.

Disclosure: I own ZIOP call spreads.

(A version of this post appeared on InsideOptions Pro yesterday.)
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