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Bulls hope Infinity lives up to name

David Russell (david.russell@optionmonster.com)

Infinity Pharmaceuticals has been bottoming after a massive pullback, and the bulls are piling in.

optionMONSTER's Heat Seeker monitoring system detected a slew of upside activity in the drug developer today, with investors implementing several strategies. The first thing they did was buy the October 16 in-the-money calls for $3.40. More than 1,200 of those traded against previous interest of just 3 contracts, clearly showing that these are opening positions.

The next trade appeared in the August 17 puts, with an even 5,000 sold for $0.71. Seconds later, another 3,000 hit in the October 15 puts for $0.95, also sold. Volume was more than twice open interest at both strikes.

Owning calls locks in the price where shares can be purchased, giving them potential leverage to the upside. Selling puts lets investors collect income in return for agreeing to buy stock in the event of a pullback. It's a neutral-to-bullish strategy, reflecting a belief that downside is limited and showing a willingness to own the stock at lower prices. (See our Education section)

INFI is up 9.24 percent to $19.63 in afternoon trading. It rallied from $6 to $50 between February 2012 and March 2013 but then pulled all the way back below $16 by early this month. The stock has been holding its ground since, and now the bulls are looking for a bounce as the 10-day moving average turns higher.

The company has ridden a wave of enthusiasm toward its pipeline of potential cancer drugs, and much of the recent selloff was met with put selling as investors wagered that it was near a bottom.

Another trader combined short puts with long calls to craft a highly leveraged position similar to owning shares. He or she sold 1,400 of the August 16 puts for $0.30 and bought an equal number of August 20 calls for $0.75. The trade cost $0.45 and will double the investor's money for every $0.45 that INFI trades above $20.45 by expiration.

Total option volume is 6.5 times greater than average in the name so far today.

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