Depomed Inc (NASDAQ:DEPO) shares up judge clarifies terms in Purdue patent suit, according to Bloomberg. DEPO shares were on fire today, as the stock closed up nearly 15% on above average trading volume. Not only that, but option players were extremely active in the drug company.

DEPO Options Activity

You see, on an average day, we’ll typically see about 650 call contracts trade in DEPO. However, over 5k call contracts traded today, which was 7 times greater than the average volume.

And do you what else?

Most of this call activity happened in the form of buying.

With the stock closing at $13.75, there were over 2k April $15 calls that traded within a range of $0.30 to $0.45. In other words, someone is placing a bet that today’s momentum continues into the next two weeks, when the options expire. If the stock doesn’t move, these options will expire worthless on the expiration date, which is April 21.

In addition, we know that these options were bought, because the traders paid on the ask side. Not only that, but going into the day, there were only 376 contracts on the April $15 call line, so we know for sure that someone was initiating a new position because the volume exceeded the open interest.

These option players need to see the stock rise at least 12% to break even on if they hold till expiration. What is also interesting, the stock announces earnings in May. Instead of buying options that cover that period, the option players feel like the move in DEPO will happen before that.

We’ll have to see if this is just a dead cat bounce, or if today’s move had something more behind it.

DEPO Performance and Fundamentals

The stock traded between $12.10 and $13.90  today. Now, DEPO traded between $11.83 and  $27.02, over the past 52 weeks, and it’s a long way away from its 52-week high. The stock is currently 49% off its 52-week high and nearly 14% above its 52-week low.

Here’s a look at DEPO’s recent performance on the daily chart:

Source: Investing.com

Looking at the chart above, DEPO is still in a downtrend, and is currently trading below its 20-, 50- and 200-day simple moving averages. Consequently, we’ll need to see a break above one of those SMAs to confirm a reversal in trend, or we would need to see the shorter-term SMA cross above the longer-term SMAs. However, the stock just came out of oversold conditions, according to the RSI.

Let’s move on to some valuation ratios.

Depomed has a price-to-book ratio of 3.0, which is above the industry average of 1.6. DEPO has a price-to-revenue ratio of approximately 1.7. Additionally, based on next year’s revenues estimates, the company has a forward price-to-revenue of around 1.65.  The stock also has a price-to-sales ratio (P/S) of 1.63, which is below the industry average of 2.5. DEPO has  50.66M shares floating, 62.1 million shares outstanding, and a short ratio of 19.85%.Consequently, DEPO could potentially see a short squeeze due to its short interest.

Final Thoughts

There was some interesting options activity in DEPO today, and option players seem like they’re betting DEPO continues its momentum. From a technical standpoint, the stock needs to see the stock run higher, for a confirmation of a trend reversal.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Learn More

Leave your comment

Related Articles: