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Why trader sees DepoMed near top

David Russell (david.russell@optionmonster.com)

DepoMed has been on a tear for months, and now one investor is calling a top.

optionMONSTER's Depth Charge tracking system detected the purchase of about 1,000 February 5 puts for $0.59 and the sale of an equal number of February 10 calls for $0.46. Volume was above open interest in both strikes, and overall option activity in DEPO was 32 times greater than average yesterday.


The trade cost about $0.15 and will make money if the pharmaceutical company falls below $4.85. It may have been the work of a shareholder looking to protect a long position in the name, or as an outright speculative bearish bet.

If it was done against stock, the trade would be known as a collar . Because the trader wrote the February 10 calls, he or she will be forced to sell the shares if DEPO closes above that level on expiration.

If the trader doesn't own stock, the position would be akin to shorting DEPO, though with much more room for error because the position loses money only above $10--a level the company hasn't seen in almost 12 years.

DEPO rose 1.56 percent to $6.51 yesterday and has more than doubled in the last six months. Most of the gains have resulted from a decision in August by Pfizer to drop a potential patent-infringement case against the smaller company.
There was also a bearish calendar spread on the stock about a month ago. (See our Education section)

(Chart courtesy of tradeMONSTER )