Schaeffer's Trading Floor Blog

Molycorp Inc (MCP) Option Traders Shrug Off Technical Troubles

Given MCP's chart troubles, these call buyers may be shorts in disguise

by 9/11/2013 1:37 PM
Stocks quoted in this article:

Molycorp Inc (NYSE:MCP) shot to its highest intraday mark since Aug. 14 yesterday, on reports that both China and Russia are planning to build up their respective stockpiles of rare earths. The positive price action had option traders displaying a preference for long calls over puts, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). By the numbers, speculators bought to open 3,209 calls on Tuesday, compared to 1,186 puts, resulting in a bullishly skewed single-day call/put volume ratio of 2.71.

Tuesday's activity only highlights the broader trend witnessed in MCP's options pits. MCP's 10-day call/put volume ratio of 4.34 on the ISE, CBOE, and PHLX ranks higher than 81% of similar readings taken over the past year, meaning calls have been purchased over puts at an accelerated clip in recent weeks. Expanding the time frame out to 10 weeks shows more of the same. Specifically, the stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 3.74 falls in the 90th percentile of its annual range.

In the front-month series, this bullish disposition has translated into peak call open interest at the September 7 strike. The majority of the 22,318 contracts that reside here have been bought to open, suggesting traders expect MCP to move north of $7 from its current perch at $6.77 before the close on Sept. 20. This has not occurred on an closing basis since Aug. 8 (the session before MCP took an earnings-related plunge).

This withstanding bullish bias is a bit perplexing when looking at MCP's technical backdrop. In 2013, the equity has shed 28%, while on a year-over-year basis, MCP is staring at a 44% deficit. The security's long-term chart troubles are highlighted by its 200-day moving average, which has been ushering Molycorp Inc (NYSE:MCP) lower since September 2011. The strength of this psychologically significant trendline was witnessed in yesterday's session, after it quickly contained MCP's aforementioned rally attempt.

Outside of the options pits, investors have been more bearishly inclined. Short interest rose roughly 2% in the latest reporting period, and now accounts for almost 36% of the stock's available float. Putting it all together, some of the recent increase in long call activity may simply be short sellers picking up hedges on their pessimistic positions.

If any of the buyers of the out-of-the-money September 7 call represent shorts in bulls' clothing, they were willing to pay a bit more for the options-related insurance. Implied volatility at this strike is inflated relative to the stock's 20-day historical (realized) volatility (55% vs. 42.4%), implying premium is relatively expensive at the moment.

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