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Bulls Charge Rebounding Vale SA (ADR) (VALE) Options Pits

VALE sees large influx of call activity

by 7/17/2013 12:17 PM
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Overall, Vale SA (ADR) (NYSE:VALE) has had a rough 2013, falling 31.5% year-to-date. However, since bottoming at a four-year low of $12.39 on July 5, the stock has rebounded 16.2% to trade at $14.40, spurring an influx of call activity in VALE's options pits. In fact, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open almost three VALE calls for every put during the past two weeks, resulting in a 10-day call/put volume ratio of 2.98. What's more, this ratio ranks in the 56th percentile of its annual range, conveying calls are being snatched up over puts at a slightly higher-than-usual pace.

Following this trend, today's speculators have, so far, picked up roughly 31,000 calls, which is four times the intraday norm and more than seven times the number of puts. Much of this call activity was seen at the August 16 strike and the December 20 strike, where roughly 8,000 and 6,700 contracts have changed hands, respectively. At each strike, the overwhelming majority of contracts went off at the ask price, suggesting they were purchased. Likewise, implied volatility has increased, and data from the ISE confirms buy-to-open activity at each strike, indicating that the trades were likely on the opening side.

By purchasing these calls to open, today's options players anticipate VALE's rebound to continue through the rest of the year. Specifically, call buyers at the August 16 strike expect VALE to climb 11.9%, to finish above of the breakeven price of $16.11 -- the strike price plus the volume-weighted average price (VWAP) of $0.11 -- by the close on Aug. 16, when soon-to-be front-month options expire. Meanwhile, call buyers at the December 20 strike expect VALE to head north of the breakeven price of $20.12 (strike price plus VWAP of $0.12) by December expiration. This represents territory unreached since early February.

In VALE's options pits, more than 66,000 contracts represent open interest in the soon-to-expire July put series, which could end up translating into options-related support down the road, as these bearish bets start to unwind. On a similar note, short interest accounts for 3.1% of VALE's available float, which would take almost five days to cover, at the stock's average pace of trading -- signaling a healthy amount of sideline cash. Moreover, since the last reporting period, short interest on VALE has dropped 5.8%. Therefore, should the stock continue to advance on the charts, more short sellers may rush to cover their bearish bets, which could serve as a tailwind for VALE.

Also of note, Vale SA (ADR) (NYSE:VALE) is scheduled to release its quarterly earnings report on Aug. 7. Analysts, on average, expect a per-share profit of 44 cents, which represents a discount to last year's 51 cents per share.


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