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Why bulls rushing back to Star Scientific

David Russell (david.russell@optionmonster.com)

Star Scientific is a tiny stock that occasionally makes giants moves. Yesterday was one of those days.

On the surface, the company's main business is developing tobacco products such as non-carcinogenic cigarettes. Its revenue has been below $1 million each of the last four years and its $250 million market cap leaves it off the radar of most investors.

But some observers think something else is going on: CIGX may have hit upon a compound with the potential to treat Alzheimer's Disease. The chemical in question--known as RCP-006, or anatabine--occurs naturally in tobacco. And it seems to reduce the toxic protein amyloid, which many scientists believe causes Alzheimer's. (See this article by money manager James Altucher, who deserves credit for recognizing the potential importance of the news.)

Others are now waking up to the stock, driving it 28 percent higher in the last two sessions. The option action also heated up yesterday as investors snapped up more than 5,000 March 2 calls for $0.15 to $0.30. The August 2.50s, April 2s and January 2.50s were also aggressively purchased.

While volume was below open interest in all those strikes, that kind of buying is still noteworthy. Almost 16,000 contracts traded overall in the session, about 12 times more than average. And 97 percent of them were calls, a reflection of the strongly bullish sentiment.

CIGX ended the session at $2.38, its highest price in 11 months. Short interest also represents a hefty 15 percent of the float, which could potentially push the stock higher if those traders are forced to cover their positions.