Shares of MannKind Corporation (NASDAQ:MNKD) rocketed more than 41% higher yesterday. Try as I might, I could find no news for the rally. Absolutely nothing. MannKind does have an earnings report on the horizon, but quarterly figures aren’t expected until mid-March. Given MannKind stock’s history, chasing this rally isn’t a losing proposition … but should you?

For those that don’t know, MannKind is a biopharmaceutical company that makes a unique inhalable insulin product. When it was first developed, it was the first of its kind. But sales have failed to live up to excessive expectations. As a result, marketing partner Sanofi SA (ADR) (NYSE:SNY) bailed on the drug, leaving MNKD to fend for itself in marketing Afrezza.

Click to Enlarge MannKind stock has been in limbo ever since, surging and plunging at the whims of speculative traders. Yesterday’s 41% spike is evidence of this rampant speculation, and it is not out of the norm. Back in October, MNKD saw a similar bullish spike that sent the shares soaring more than 170% in less than a week.

The end result, and MannKind stock investors know, was not kind. MNKD plummeted back to earth before the end of the month and proceeded to grind lower through the end of the year.

At least part of MannKind stock surge yesterday could be attributed to the short selling community. As of the most recent reporting period, some 32.9 million MNKD shares were sold short. This accumulation of bearish bets represents a whopping 45.5% of MannKind’s total float, or shares available for public trading.

When MNKD stock edged above its 50-day moving average yesterday, technical buyers likely jumped on the stock, pushing it above former resistance at $3.00. This breakout may have spooked the weaker short hands, prompting a brisk short covering rally.

That said, there appears to be little left to drive MannKind stock any higher. This leaves the shares vulnerable to a pullback. But don’t expect a similar plunge on the decline. Short-term support lies at $3.50 for any correction. Additionally, a long-term hard floor rests near $2.25, with the stock’s 200-day moving average rising into the area.

Sentiment is surprisingly bullish on MannKind stock. According to data from Thomson/First Call, MannKind has attracted just two analysts following the shares, both doling out “buy” ratings. The consensus price target rests at a lofty $7, more than 84% above MNKD’s post-surge trading range.

Turning to MNKD’s options configuration, we find activity typical of low dollar stocks. Most of MannKind’s open interest is centered on the $3 and $3.50 strikes in the February series. Both of these strikes are now trading firmly in the money, and I would expect profit taking to emerge in today’s trading.

What’s more, MNKD’s February put/call open interest ratio comes in at 0.39, with calls nearly tripling puts among short-term options. That’s quite a bullish outlook, even for a dollar stock.

Overall, February options prices are through the roof following yesterday’s surge. Implieds are pricing in a move of more than 31% heading into expiration. As a result, the upper bound lies at $5, while the lower bound lies at $2.60. That’s quite a range, and it encompases short-term resistance as well as MannKind stock’s long-term floor near $2.50.

Two Trades for MNKD Stock

Put Spread: My gut reaction to high implieds is to sell option premium. But MNKD is way too volatile to make that feasible, without ending up owning the shares. Another strategy for MNKD options traders is to buy puts or a put spread. Keep in mind that high implieds are going to eat into your profits considerably, however.

The best short-term play out there appears to be the Feb $3/$3.50 bear put spread. At last check, this spread was offered at 23 cents, or $23-per-pair of contracts. Breakeven lies at $3.27, while a maximum profit of 27 cents, or $27-per-pair of contracts — a return of only about 18% — is possible if MannKind stock closes at or below $3 when February options expire.

Alternately, if you are expecting a larger move, you could just buy the Feb $3.50 put and not sell the Feb $3 put. The return potential is much greater, but the breakeven point is also considerably lower.

Call Sell: If you are feeling particularly brave, or certain that MannKind stock is going to fall in the wake of yesterday’s rally, you could always risk selling premium. For instance, selling the Feb $5 call would result in a credit of 36 cents, or $36-per-contract.

The $5 level is the upper range of February implieds, and technical resistance is stiff in the area. As such, barring another rally like yesterday’s, you shouldn’t end up owning the shares. However, MNKD’s history of volatility makes such a bet without the expectation of owning the shares very risky.

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