Bears target Keryx one day after rally

optionMONSTER

The mood in Keryx Biopharmaceuticals went from exuberance to fear in one day.

The drug developer exploded higher on Monday after a writer on Seeking Alpha confidently predicted success for its Perifosine cancer drug. Yesterday the stock fell more than 11 percent to $4.37 and put volume surged as holders flocked for protection.

optionMONSTER's Depth Charge tracking system detected one particularly large trade yesterday as 2,500 June 4 puts were bought for $1.75 and 5,000 June 2 puts were sold for $0.45. Volume was above open interest in both strikes.

The trade cost $0.85 and will earn a maximum profit of 135 percent if KERX closes at $2 on expiration, with gains eroding below that level. Known as a ratio spread , the strategy is a common means to hedge against a drop in a stock's price. The only capital at risk is the initial investment of $0.85.

Ratio spreads normally lose money if the stock moves too much in the intended direction, but not in the case of yesterday's transaction because the threshold would be zero. Investors who like stocks often use the strategy because it protects them to the downside, while letting them accumulate more shares at a lower price if they fall. (See our Education section)

Also in the session, an investor sold about 5,200 April 3 calls for $1.65 and bought an equal number of April 6 calls for $0.80. That trade was also bearish, representing a bet that KERX will close below $3 seven weeks from now.

Overall option volume was 9 times greater than average in the session, according to the Depth Charge.

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