This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Options 'Flow' Foretold Questcor Plunge

NEW YORK ( TheStreet) -- Trading or investing in biotech stocks is often a high-risk venture. To manage some of this risk with your existing positions -- or to identify trade opportunities for new positions -- it often helps to follow what the so-called "big money" investors and traders are doing. This is often accomplished by looking at public filings of major investors or funds. I prefer an alternative approach: Monitoring unusual option activity or "flow" on a daily basis. Keeping a close eye on the option flow in real time gives me insight into what large traders and investors are doing and helps foreshadow future stock-price movement.

Questcor Pharmaceuticals (QCOR) is a perfect recent example of why monitoring option flow can be so important for traders. Last Tuesday, very large and unusual activity in the October Puts was spotted. It looked like a large trader, most likely a fund or large existing stockholder, purchased 8,000 of the OCT 50/40 strike Put spreads i.e. purchased to open ~8,000 OCT 50 strike Puts, and sold to open ~8,000 OCT 40 strike Puts while the shares were up $2 on the day. This was a very bearish trade and was unusual in size.

The next day, negative news broke about reimbursement coverage for Questcor's drug Acthar. The stock dropped over 50% on heavy volume. Irrespective of what the large trader knew beforehand about this news (coincidence?), the returns on the trade were stunning and the lesson to the smaller trader/investor was clear: Integrate option flow monitoring into your daily routine.

Questcor shares fell 30% to $21 Monday following disclosure of a U.S. investigation into the company's Acthar drug marketing practices.

Retail investors or traders can identify unusual option flow quite easily by paying attention to a stock's Options Chains or by the unusual trade alerts or monitoring services offered by most option brokerages sites.

Unusual volume for most small-cap biotech companies typically translates into volume greater than 1,000 contracts and several times larger than current Open Interest. (This needs to be put in perspective with average daily volume levels.) The trades to really focus on are those executed in large blocks, like the trades seen in Questcor last week.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,031.14 +43.63 0.26%
S&P 500 1,984.13 -1.41 -0.07%
NASDAQ 4,518.9020 -48.6960 -1.07%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs