Red-Hot Drug Stock Could Crush Shorts

KPTI options traders could be using calls to hedge

The shares of Karyopharm Therapeutics Inc (NASDAQ:KPTI) are up 15.9% to trade at $10.31 today, as analysts react to Wednesday's news that the company won accelerated approval from the Food and Drug Administration (FDA) for Xpovio, their treatment for blood cancer.

No fewer than six brokerages have hiked their price targets since the approval, the highest coming from H.C. Wainwright to $32 from $29. The analyst at RBC said the approval "bodes well for the drug's label expansion into a broader population."

What a week it's been for Karyopharm stock -- on track for its best since June 2014 -- gapping higher 15.6% on Tuesday, and 36% on Wednesday after the FDA approval broke. Wednesday's surge put the shares above their 200-day moving average on a closing basis for the first time since October. And while KPTI has toppled its year-to-date breakeven point today, it is still staring at a 45% year-over-year deficit.

A short squeeze could power more gains. Short interest increased by 34% in the two most recent reporting periods to a record high 8.96 million shares. This accounts for 19% of KTPI's total available float, and almost two weeks' worth of pent-up buying power, at the stock's average pace of trading.

On the options front, calls look to be extremely popular among traders. This is per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which shows KPTI sporting a 10-day call/put volume ratio of 3.74. Given the amount of short interest tied up into the stock, it's possible some of this call buying could be shorts hedging against any additional upside.