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How Molycorp Inc (MCP) Traders Bet Against a Rebound

Short-term Molycorp Inc calls were in demand yesterday

by 5/15/2014 9:52 AM
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Option Brief: Molycorp Inc (NYSE:MCP) calls and puts both traded at an above-average pace yesterday. By the numbers, puts had a decisive advantage, with 34,000 crossing the tape, versus 13,000 calls. Against this backdrop, the rare earths stock's 30-day at-the-money implied volatility (IV) touched an annual high, and finished 1.8% higher at 96.5%, indicating elevated demand for short-term MCP options.

Despite Wednesday's skew toward puts, the weekly 5/23 3-strike call received notable attention, with 5,374 contracts exchanged. Digging deeper, a block of 3,283 contracts traded here at the bid price of $0.15 apiece, suggesting they were sold. Also, open interest at the strike soared overnight -- more than any other MCP option -- hinting at the creation of new neutral-to-bearish positions.

Yesterday's Molycorp call sellers are looking for the shares to remain below $3 through the closing bell next Friday, when the weekly options expire. If that happens, they will retain the entirety of the initial premium collected. If the stock rallies above the strike during the contract's short lifetime, however, the traders are at risk of assignment -- which carries theoretically unlimited risk.

On the technical front, Molycorp Inc (NYSE:MCP) continued to falter yesterday in the wake of its first-quarter earnings miss from last week. Specifically, the shares lost 6.4% on the day to finish at what was an all-time low of $2.91. This morning, however, MCP has touched an even lower low of $2.76, but was last seen at $2.80.


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