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Are The Mosaic Company's Bears Hedging Their Bets Ahead of Earnings?

Short selling and call buying have been rising in tandem on this fertilizer concern

by 3/30/2010 12:00:00 PM
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Fertilizer specialist The Mosaic Company (MOS) is on deck to release its is fiscal third-quarter earnings figures after the close of trading on Wednesday, with analysts anticipating a profit of 64 cents per share from the company. In the same quarter last year, Mosaic earned 18 cents per share. Historically, the company has been a poor performer in the earnings limelight. In fact, the firm has missed Wall Street's expectations in three of the prior four reporting periods, while topping forecasts only once. On average, MOS has fallen short of analysts' estimates by about 38% during this time frame.

Heading into tomorrow's report, it appears that investors are expecting more of the same from MOS. For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.70 arrives higher than 90% of all such readings taken during the past year, meaning that this ratio is just 10 percentage points shy of an annual bearish peak. That said, this ratio has trended lower since setting a near-term peak of 0.79 on March 19, hinting that calls are beginning to gain traction among options speculators.

SOIR chart for MOS

Data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) also points toward an increased preference for MOS calls. Specifically, the stock's 10-day ISE/CBOE call/put volume ratio of 4.05 indicates that calls bought to open have more than quadrupled puts purchased during the prior two weeks. This ratio also arrives higher than 85% of all those taken in the past year, meaning that options traders have rarely snatched up calls at a faster pace, relative to puts, during this time frame.

However, this increased call activity is not necessarily indicative of a shift toward optimism among MOS investors. During the most recent reporting period, the number of MOS shares sold short spiked by nearly 20% to account for roughly 4.5% of the stock's total float. Given that we have seen call buying increase in tandem with short selling, it is possible that these bearish investors are buying calls as a way to hedge their short positions.

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