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In the absence of insider information, there is nothing prophetic about options open interest data. However, it can reveal a lot about expectations and stock sentiment. This data is especially useful for smaller capitalization companies because the stocks are likely difficult to sell short, so investor interest in stock options is likely to be more straightforward. Here is a list of some biotechnology stocks with a high ratio of call open interest to put open interest. We have included a sum of both the contracts and notional value of the open interest, but please be aware that the notional value is based on the last option price. As such, this is just an exercise in displaying the general magnitude of the bullishness among options investors.

COMPANIES TO WATCH

Dendreon Corp (DNDN) - The company itself is not speculative. It is probably one of the safer bets in the stock market's riskiest industry. The company recently squared away its Provenge coverage issues with Medicare and Medicaid and it nearly doubled its productive capacity with the FDA approval of its Orange County facility. Demand is likely to outstrip supply and the market for the label use is decent. The potential off-label market is massive. Considering the treatment price of $93,000, there is tremendous upside if things go perfectly. Why is this a speculative stock when the company is in such a favorable situation? Simple. At a market capitalization of $5.61 billion, the stock trades at stretched valuations that price in much of the upside.

Here is information for the out-of-the-money ("OTM") option open interest data for the January 2012 expiration. Please keep in mind that the OTM strikes for the calls range from $39 to $100 and the OTM strikes for the puts range from $2.50 to $38.

OTM Open IntOTM Open Interest Value
January 2012 Calls43,749$7,434,747
January 2012 Puts12,888$1,474,308

Here is information for the out-of-the-money ("OTM") option open interest data for the January 2013 expiration. Please keep in mind that the OTM strikes for the calls range from $40 to $60 and the OTM strikes for the puts range from $17.50 and $35.

OTM Open IntOTM Open Interest Value
January 2013 Calls6,460$4,308,105
January 2013 Puts4,489$1,823,565


The options data clearly shows a bullish bias among DNDN options investors. While this may be a good predictor of future stock performance, it is almost certainly a good measure of investor sentiment. For Dendreon bulls, the bullish bias among option investors may be reassuring but it could also signal the potential for a sharp decline if unexpected setbacks occur.

Arena Pharmaceuticals (ARNA) - The company has suffered massive setbacks recently. Over the last year, the stock dropped from nearly $8 to as low as $1.21 following negative news for the company's weight loss drug, Lorcaserin. While the probability of success is generally low, a successful resubmission to the FDA would be very positive for ARNA as would collaboration with a new drug partner. In the absence of these catalysts, the company is very speculative.

Open interest skews heavily towards calls versus puts. This is in large part because of the stock's low price. As such, there is only one OTM strike for puts. Still, this does not negate the bullishness expressed in the open interest data. Investors are clearly optimistic about the stock price.

OTM Open IntOTM Open Interest Value
January 2012 Calls26,793$376,776
January 2012 Puts4,726$47,260


Cell Therapeutics (CTIC) - Like Arena Pharmaceutical, CTIC is a fallen biotech stock. The company's headline drug, Pixantrone was rejected by the FDA and now the stock trades close to 52 week lows. The last two years have not been a good stretch for shareholders with the stock dropping from around $10 to the current price of $1.42. The stock is not for the faint of heart. It avoided delisting with the help of a reverse split and a $30 million preferred stock sale. Going forward, the company still has reasons for optimism. Following the new capital raise, the company has gained a little bit of breathing room. Also, while the company's fortunes depend heavily on the status of Pixantrone, it is not a one trick pony. Cell also has ovarian cancer drug Opaxio in phase 3 trials.

Options investors may still buy into the bullish thesis for this stock. The company has a large skew in its OTM option open interest towards calls. For the January 2012 expiration, OTM call option open interest was 25,427 contracts and OTM put option open interest was 3,215. While part of this skew is an artifact of the fact that there is only one OTM put strike, this does not explain away the full bias. As such, it is likely evidence that despite the depressed stock price, investors still believe that the company's stock is capable of meaningful upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARNA, CTICD over the next 72 hours.

Source: Options Reveal Bullishness on These 3 Speculative Biotech Stocks