Analyst: This Biopharma Stock Could Surge 76%

Call options are trading at a faster-than-usual clip on the healthcare name

Cantor Fitzgerald today initiated coverage on Array Biopharma Inc (NASDAQ:ARRY) with an "overweight" rating and $30 price target -- representing a premium of 76% to Monday's close at $17.07. The brokerage firm said Array's "lead asset, Mektovi+Braftovi, still appears underappreciated by investors," and the combination "has a best-in-class profile and is well-positioned commercially." The shares are only modestly higher today, but ARRY options are trading at a much faster-than-usual clip.

Array Biopharma shares gapped higher on Jan. 7, as analysts waxed optimistic on the impact of the Eli Lilly (LLY) acquisition of Loxo Oncology (LOXO). Since then, ARRY has been consolidating its gains atop the $17 level, and was last seen 0.3% higher at $17.12. But while the security has rallied 36% since its Oct. 11 low of $12.56, it's still staring up at its June 21 record high of $20.21.

As alluded to earlier, Array options are seeing unusual volume today. So far, roughly 1,400 calls have crossed the tape -- three times the average afternoon clip, and more than four times the number of ARRY puts exchanged. Most active is the January 2019 18-strike call. Buyers of the call expect ARRY shares to topple $18 by the close on Friday, when front-month options expire.

From a longer-term perspective, today's appetite for ARRY calls is just more of the same. While absolute volume tends to run light on the medical stock, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open nearly 29 calls for every put in the past 10 weeks.

However, some of that call buying -- particularly at out-of-the-money strikes -- could be attributable to short sellers seeking an options hedge. Short interest on ARRY grew 7.8% in the most recent reporting period, and now represents 11.4% of the stock's total available float. At the equity's average pace of trading, it would take nearly seven sessions to buy back these pessimistic positions -- plenty of fuel for a short squeeze to drive additional gains.