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Options Players Zero In on Targacept Puts

TRGT sees an unusual climb in put volume

by 12/23/2011 12:52 PM
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Targacept (TRGT - 5.48) has seen a significant increase in put volume today, as more than 3,600 of these options have changed hands so far, reflecting seven times the equity's expected intraday volume. At least 2,500 puts were traded at the out-of-the-money January 2012 5 strike -- all of them at the bid price, pointing to seller-driven activity. This option is currently home to open interest of just 511 contracts, making it safe to say that new positions are being initiated here today. By selling these puts to open, traders are betting on TRGT to remain north of the $5 level by the time front-month options expire.

Despite this surge in put volume, calls still appear to be the options of choice on the biopharmaceutical company. The Schaeffer's put/call open interest ratio (SOIR) stands at a meager 0.18, meaning that calls outnumber puts by more than five to one among options slated to expire within three months. In fact, this ratio ranks in only the 5th percentile of its annual range, confirming that short-term options players have been more bullishly aligned toward the stock just 5% of the time over the past year.

What's more, TRGT's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at a whopping 102.28. This conveys that calls bought to open have outnumbered puts by more than 102 to one during the past couple of weeks.

However, short interest on TRGT skyrocketed by more than 103% over the past two reporting periods, suggesting that some of the recent call volume could be the result of hedging activity by short sellers. Either way, these bearish bets make up a lofty 14.76% of the equity's float. At the stock's average daily trading volume, it would take over six days to buy back these shorted shares.

Additionally, TRGT has been a technical laggard in 2011, having shed more than 79% of its value year-to-date, and underperforming the broader S&P 500 Index (SPX) by over 68% during the past 60 sessions. On the charts, the stock is trading well below its 10-week and 20-week moving averages, after succumbing to drug-related gaps lower on Nov. 8 and Dec. 20.

At last check, however, TRGT has gained about 3% to wink at the $5.48 level.


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