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Questcor bears are running for cover

David Russell (david.russell@optionmonster.com)

Questcor Pharmaceuticals was a great short, but now the bears are running for cover.

The stock lost more than half its value in September after a professional short-selling firm said the company would struggle to sell its high-priced H.P. Acthar drug. Our Depth Charge monitoring program lit up with downside activity one day before , reaping huge profits overnight.

QCOR bottomed later that month and has been working its way higher since. The last earnings report on April 30 missed expectations, but management reported improving sales for the Acthar product. Roth Capital reiterated its "buy" rating the next day.

The stock, which had been fighting resistance at its long-term 200- and 500-day moving averages, paused briefly before breaking out. It's adding another 8.8 percent to $40.80 in this afternoon and is up 18 percent in the last week.

Short interest stood at a massive 60 percent of the float on April 30, and those bears have been scrambling to cover their positions ever since. Today they turned to the option market for protection, snapping up some 3,700 of the May 39 calls, most of which priced for $1.95. Volume was almost 10 times previous open interest at the strike.

Those long calls fix $39 price where they can cover their shorts. The activity reflects fear QCOR will continue to run higher. Alternatively, the buyers could be initiating new long positions. (See our Education section for the wide range of flexibility afforded by calls and puts.)

Total option volume is already 5 times its daily average in the name, with upside contracts accounting for more than three-fourths of the total.

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