How These Arrowhead Research Corporation (ARWR) Bets Paid Off

Arrowhead Research Corp (NASDAQ:ARWR) is plunging this morning -- down nearly 28% to trade at $6.55 -- after the Food and Drug Administration (FDA) asked the pharmaceutical firm to reduce the dosage of its hepatitis B drug in a mid-stage trial, and placed the treatment on partial clinical hold. This is likely music to the ears of option bears, who were especially active on Friday.

Diving right in, puts crossed the tape at almost six times the average daily rate last Friday. ARWR's most active option was the January 2015 9-strike put, where 1,130 contracts changed hands -- a number of which were bought to open. In short, these traders are gambling on the shares to end this week -- when front-month options expire -- below breakeven at $8.47, or the strike less the volume-weighted average price (VWAP) of $0.53.

Given this morning's sell-off, the January 9 puts are now safely in the money. What's more, the buyers are already staring at paper profits, based on the option's current VWAP of $2.41.

Taking a step back, Arrowhead Research Corp (NASDAQ:ARWR) -- which landed on the short-sale restricted (SSR) list out of the gate -- has seen a rush of bearish betting in recent months. During the last 50 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has tallied a put/call volume ratio of 0.49 -- just 9 percentage points shy of an annual high. Additionally, 31.5% of ARWR's float is sold short, and it would take more than a week to buy back these shorted shares, at typical daily trading volumes.