Genentech (DNA, $82.10, up $0.86) came out with some great news yesterday after the bell and said a late-stage study combining Avastin with Tarceva to treat lung cancer was a huge success. Tarceva is a drug from OSI Pharmaceutical’s (OSIP, $36.39, up $0.79) pipeline and is marketed by Genentech. The two drugs were used as treatment for patients with “advanced nonsmall cell” lung cancer.

The phase 3 trial was stopped early following the recommendation of an independent data safety monitoring board and they could be taking this thing to the FDA real soon. Both stocks got a lift in after-hours, Genentech was up another 90 cents but OSI was up 11%, or $4.04, to $40.43.

The reason OSI Pharmaceutical get more of a pop is because of the whole Genentech/Roche garbage. Roche’s new bid has put a lid on shares and if Genentech would have gotten the pop like OSI did, the stock would be in the low $90’s. No matter how good of a trader you are or how much you study a trade that looks “money”, the market can throw you a curveball.

The OSI call options will get a huge boost on Tuesday. Watch the February 40 calls (GHUBH, $1.00, up $0.50) which had huge volume yesterday and the February 45 calls (GHUBI, $0.15, up $0.06) which traded over 4x its open interest. The clue here during the day was how much the February 40 call options jumped compared to the stock move. The stock was up 2% but that shouldn’t warrent a $4 out-of-the-money call to jump 50%. The February 40 call options could open up anywhere from $2-$3 if the gains hold.

DO NOT chase these calls or trade them, I just want to show you how much they are going to pop this morning.

Genentech is getting a raw deal and maybe the tide will start to turn with this huge announcement. There’s just too much momentum behind the company for the market to ignore. Roche is throwing the baby out with the bath water in its attempt to get Genentech on the cheap. Hopefully, the market will see this and start rewarding Genentech with the premium it deserves.

Elsewhere, there was heavy trading in Amgen’s (AMGN, $55.36, up $0.51) call options. The February 60 calls (YAABL, $0.39, up $0.16) traded over 4,000 contracts and the March 60 calls (YAACL, $1.21, up $0.14) traded over 1,800. There’s talk that Amgen could be a takeover target.

I like the March 60 calls more than the February’s because they allow much more time for not much more premium. In other words, I get an extra 4 weeks for the stock to move past $60 for 80 cents. If the stock gets anywhere near $60 it should have the strength to challenge its 52-week high of $66.51. If you are going to swing for the fences, swing big baby.

Biotech has been hot and time will tell if it gets “white” hot. It’s been frustrating to watch the events with Genentech because things are happening that should have pushed the stock to over $100.

Rick Rouse