If Valeant Pharmaceuticals Intl Inc (NYSE:VRX) isn’t on your bullish list yet, you should put it there now. The much-maligned pharmaceuticals firm is finally turning the corner following months of litigation, restructuring and divestitures, and the leaner business model has VRX bears running scared.

A little over a year ago, everyone on Wall Street was blasting Valeant. Even Berkshire Hathaway Inc.’s (NYSE:BRK.A) Warren Buffett called the company’s business model a “Wall Street scheme” and “enormously flawed.” Buffett’s partner Charlie Munger was even more candid, calling the company a “sewer” and noting that it deserved everything it got.

In the past year, Valeant has managed to put most of its legal woes behind it. The pharmaceuticals firm has divested several brands to slim down its portfolio, handing off its iNova Pharmaceuticals business to Pacific Equity Partners and The Carlyle Group for $930 million in cash, dropping Dendreon to Sanpower for $820 million, and selling three skin-related brands to L’Oreal SA (ADR) (OTCMKTS:LRLCY) for $168 million.

As a result, Valeant has been able to pay down about $1.5 billion in debt since the start of the year.

Click to Enlarge And the moves have had a serious impact on VRX stock. Nearly a year from Munger’s “sewer” derision, Valeant hit bottom at $8.31 on April 24. It has been all upside since then. In fact, VRX stock has more than doubled during this time frame, taking out resistance at both its 50-day and 200-day moving averages and pulling these longer-term trendlines toward an eventual bullish cross and putting VRX squarely in the crosshairs of bullish technical traders.

The sentiment front has been slow to change for VRX, but that situation, too, is on the verge of a rapid shift toward the bulls’ camp. Valeant is set to release its quarterly earnings report in early August, and any positive news could be just the catalyst the company needs to shake up its bearish sentiment backdrop.

How bearish is that backdrop? Take the brokerage community, for starters. Thomson/First Call reports that only four of the 20 analysts following VRX stock rate the shares a “buy.” That’s quite a bit of room for upgrades.

Elsewhere, short interest currently stands at about 34 million shares, representing 11% of VRX’s total float, or shares available for public trading. But, during the most recent reporting period, the number of VRX shares short plunged 24%. It seems that a 100% rally in three months is enough to spook quite a few short sellers. And if VRX continues its march higher, this short-squeeze situation is only going to get worse for Valeant bears.

Judging from VRX’s options backdrop, hedging is becoming a way of life for short sellers. The August put/call open interest ratio has plummeted during the past several weeks from a reading north of 0.80 to its current perch at 0.60, putting calls on the verge of doubling puts among options most affected by the company’s quarterly earnings report.

As for implieds, August VRX options are pricing in a potentially sizable move of about 18% for the stock. This places the upper bound at about $20, with the lower bound arriving at roughly $14.

There is plenty of technical support at $14 to limit a VRX decline on a poorly received quarterly report, but given that shorts will be using the opportunity to cover, I don’t think it will come to that. A breakout above $20, however, could be huge, and potentially force even the most stalwart shorts to rethink their positions.

2 Trades for VRX Stock

Call Spread: With Valeant looking to turn the corner, and VRX stock already responding with bullish intent, sentiment is left to play catch-up. A continued unwinding of penned up negativity could bring more sideline money to VRX stock and send the shares even higher than options implieds are expecting.

For traders looking to benefit from this VRX resurgence, an Aug $18/$20 bull call spread has considerable potential. At last check, this spread was offered at 60 cents, or $60 per pair of contracts. Breakeven rests at $18.60, while a maximum profit of $1.40, or $140 per pair of contracts, is possible if VRX stock closes at or above $20 when August options expire.

Put Sell: Alternately, if VRX stock’s recent bull run has you concerned about a potential consolidation period, an Aug $14 put sell has a good chance of finishing out of the money. At last check, this put was bid at 43 cents, or $43 per contract. As usual with a put sell, you keep the premium as long as VRX stock closes above $14 when August options expire. On the downside, if VRX trades below $14 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $14 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.