Pharmaceutical Options May Bring Opportunity

While much of the rest of the market grapples with the staggering volatility in the financial space, a number of prominent biotech/pharma names are presenting unusual volume and volatility symptoms.

Shares in analgesics developer Pain Therapeutics (PTIE Quote - Cramer on PTIE - Stock Picks) declined 2.1% this morning -- the company has partnered with King Pharmaceuticals (KG Quote - Cramer on KG - Stock Picks) on an extended-release painkiller called Remoxy, which last month was awarded expedited review by drug regulators.

A 10,000-lot put spread in the January contract between the 5 and 7.50 strikes sent overall volume to 51 times the normal level today. Based on the premiums paid, we're inferring that this was a long spread, initiated for a debit of 90 cents, which represents the maximum amount this trader can lose on the transaction -- and the spread he or she must earn back on a decline below $7.50 by mid-January.

If Pain Therapeutics trades between $5.00 and $6.60, the trader earns the maximum profit on this spread -- namely $1.60. A trader bullish on Pain Therapeutics shares could have sold this spread and taken the 90 cents as a credit -- but in so doing, would have limited his or her maximum profit to that amount. Shares have traded as low as $6.80 over the past 52 weeks.

Implied volatility in Amylin Pharmaceuticals (AMLN Quote - Cramer on AMLN - Stock Picks) shares rose 44.7% to 120.9% today, setting a new 52-week high and ranking among the very biggest implied-volatility gainers on our platform today. Measured shoulder-to-shoulder against the 84.6% level of deviation that Amylin shares have shown historically, this suggests the options market is pricing in about 40% more potential volatile price action than is already charted into Amylin stock.

With more than 50,000 options trading as shares find themselves 1.5% lower at $19.15, we're noting fresh and heavy buying interest in out-of-the-money puts at the October 15 level. These puts are fetching a price of $1.40 apiece, requiring a near 30% drop below current levels that would hang-drop Amylin below its standing 52-week low of $19.45. A look at Amylin's 300,000-strong open interest shows an even split between puts and calls, making today's 5:1 privileging of put positions a conspicuous indicator of sentiment.

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