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Will Bulls Surrender as Mosaic Dips Lower?

MOS could encounter contrarian headwinds in the near term

by 4/18/2012 2:25:01 PM
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Calls have been the preferred option on The Mosaic Company (MOS - 50.53), as indicated by the stock's declining Schaeffer's put/call open interest ratio (SOIR). During the past two weeks, MOS' SOIR has fallen to 0.75 from 0.80, as near-term call open interest has increased 22%. This ratio indicates that calls outweigh puts among options set to expire within three months.

The bullish bias among options players is further evidenced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where traders have bought to open 2.70 calls for every put in the previous 20 sessions. Calls remain the choice in today's session, as roughly 7,000 call contracts have changed hands, compared to 2,900 put contracts.

Apparently, most of Wall Street is expecting big things for the phosphate and potash producer. Among the brokerage bunch, 10 analysts maintain a "strong buy" rating on the stock, compared to seven tepid "holds." Plus, the consensus 12-month price target of $66.47 not only represents a 32% premium to its current perch, but it's also a level the stock has not seen, on a daily closing basis, since mid-September.

Elsewhere, short sellers reduced their bearish bets by more than 35% over the last two reporting periods. Short interest now accounts for 1% of the stock's available float, and it would take less than one day to cover these shorted shares, at MOS' average daily trading volume.

What's notable is the stock's inability to benefit from this recent short-covering activity, as this points to serious weakness in the shares. In fact, during the past 20 trading sessions, MOS has lagged the broader S&P 500 Index (SPX) by 11.4%, on a relative-strength basis. Plus, after breaching its 10-day moving average on March 29, the security has been pressured steadily lower by this descending trendline.

Daily Chart of MOS since March 2012 with 10-Day Moving Average

From a contrarian perspective, the glut of optimism surrounding the struggling stock creates the opportunity for a potential influx of selling pressure in the short term, should any of the weaker bullish hands capitulate to MOS' downward momentum. The stock has edged lower in today's session, adding to its 33.7% year-over-year deficit.

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