Questor Pharmaceuticals, Inc. (QCOR) suffered another huge sell-off, closing on Monday with a 36.67% loss at $19.08, after the company announced that its promotional practices are being investigated by U.S. government, as reported by Bloomberg. According to Seeking Alpha's market currents report, Oppenheimer downgraded the stock to perform, Piper Jaffray cut it to Neutral, and Leerink Swann reduced it to Market Perform. Just as we thought QCOR was recovering from September 19th's 47.84% loss, this government probe and several downgrades further kicked the stock down to intra-day low of $18.81, which represented 62.8% decline from September 18th close of $50.52.
As I wrote in Questcor Pharmaceuticals: A Risky Opportunity For Option Traders, dated Sep 20, 2012, published by Seeking Alpha, it was suggested for option traders to wait 2-3 more days for the stock price to settle before establishing the position in this kind of over 50% price swing situation, like what QCOR was experiencing on September 19th. With the government involvement, more analyst downgrades, and another huge price change, along with the huge trading volume of 31.41M (as compared to 30-day average of 5.15M), I decided as a more conservative option trader to wait 2-3 more days again for the price to settle further before establishing the covered short put position.
Here, I am recommending two option plays for different style of option traders.
For higher chance of winning, lower-return option play: After 2-3 days, if the price settles in the trading price range around $18-20, an option play of Oct short put $16 plus Oct put $14 will be reviewed and set up if risk/reward ratio is favorable. Maximum return will be the credit received from the spread and the maximum risk will be $2 minus the credit received.
For higher-return, lower chance of winning option play (a strategy as suggested from Seeking Alpha reader, Valueplay98): Buy Oct $26 Call and short Oct $28 Call. Maximum return will be $2.00 minus the debit spread cost and the maximum risk will be the cost of debit spread.
In short, this further drop created a huge oversold situation for the stock and although the future of QCOR is still very unclear at this moment, the developing situation and the crushing stock price made me think how much worse it can get for QCOR. Sometimes, it is all about expectation.