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.