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Anyone who's followed Questcor Pharmaceuticals, Inc. (NASDAQ:QCOR) for the last several weeks already knows the story behind it, but few know the best way to play it. To re-cap, QCOR's stock has been on fire for several years because of its flagship (and really only revenue-producing) drug, Acthar gel. QCOR has been hiring pharm reps all over the country to push it further and the numbers have been great. Revenue growth is huge at over 38% so far this year. Aetna (NYSE:AET) suddenly comes out and refuses to reimburse for certain uses of the drug and the stock plummets for $50 range to $30ish. Then the FDA reports that they are going to investigate the promotional practices of the firm and shares plummet further to sub $20 prices.

So Aetna is supposed to review their decision on the 13th of October and then Longs are looking for favorable script numbers this week and earnings on the 22nd to push the stock back to where it was. Growth stories like these in the pharm sector are trading at P/Es of 20+, but if we value the company at current earnings with an conservative P/E of 15x, the stock is worth $30 right now. Add the fact that QCOR has zero LT debt, a current ratio of 2.71 and cash flow management that will allow for an 80 cent annual dividend. Then add that shorts may have to cover a huge short interest (over 20mm shares) thus driving demand for the stock and you get an interesting opportunity to make some big money quickly. If insurance companies will continue to cover Acthar and growth for QCOR continues at the current rate, by this time next year, sales will be $400mm and earnings will be over $3/share, returning this stock to its former glory in the $50-$60 range.

Granted, this stock doesn't fit in an investor's retirement portfolio or life savings, but if he/she has a trading account to take some chances like this, Questcor is the stock to be looking at.

But what is the best way to play this opportunity? I believe that long term call options on the stock (called LEAPs) give investors a much better reward for the same amount of risk than the stock itself. If you simply buy the stock, you have a chance to double or lose everything on the news coming out in the next few weeks. Reward = 2x, risk = -1x. Not a bad move if you have reason to believe the QCOR story. But if you buy LEAP option contracts, say January 2014 calls with a strike price of $30 (trading for $3.80), you take a chance to make over 5 times your money or lose it. Right now, that option contract has $0 intrinsic value, but if QCOR jumps to $50/share between now and January 2014, the intrinsic value will be $20. $20 divided by $3.80 is 5.26. Reward = 5.26x, risk = -1. Same risk, better return.

This strategy is endorsed by the great fund manager, Joel Greenblatt of Gotham Capital in his book, You Can Be A Stock Market Genius, and makes sense when the price of a stock is expected to move around an event such as QCOR's earnings and Aetna's reimbursement decision. By investing in LEAP contracts as opposed to buying stock, you are essentially taking the same risk, but getting over 5 times the reward.

To reiterate, this isn't the type of chance you want to take with your life's savings, but if you have some play money to risk, the LEAPs on QCOR present better return possibilities for the risk.

Source: The Best Way To Invest In Questcor Pharmaceuticals