Onyx Pharmaceuticals (ONXX, news, chart) saw action during Thursday’s biotech rally. ONXX is another biotech name considered by some observers to be a possible acquisition target. So, it should come as no surprise that, after two deals were announced in the sector in less than two weeks, the stock is moving higher on hopes it might be next. For example, on April 23, 2008, shares ran higher on talks Bayer, which partnered to launch Nexavar, might be looking at ONXX. On Thursday, shares of the biotech company rose $3.68 to $40.50 and, in the options market, trading was brisk (four times normal), with 20,000 ONXX calls and 3,400 puts trading on the day.

Some of that volume can be traced back to spread trading. To be specific, shortly after 11:30 Eastern time, 2,700 of the August 50 calls traded offerside for 20 cents a contract. Meanwhile, 1,800 of the August 45 calls traded bidside for 50 cents a contract. The action has all of the hallmarks of a 3 x 2 ratio backspread. If so, the strategist is taking in a credit of .10 per spread, which s/he keeps if ONXX stays below $45.00 a share between now and August options expiration (11 trading days). A move higher and the risk graphs gets ugly fast, with big losses possible between $45.90 and $60.00 a share. Should the stock go through the roof and move significantly above $60.00, however, the trade begins to perform well.