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Molycorp Inc (MCP) Bears Aim for Historic Lows

Molycorp Inc put buyers predict the shares will keep tumbling

by 6/4/2014 10:01 AM
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Molycorp Inc (NYSE:MCP) puts have been in high demand lately. During the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the rare earths name has racked up a put/call volume ratio of 1.53 -- just 5 percentage points from an annual high. Things were no different in MCP's options pits yesterday.

Specifically, puts traded at roughly twice the rate of calls -- 31,000 contracts to 15,000. Against this backdrop, the stock's 30-day at-the-money implied volatility (IV) rose 9.1% to 86.9%, indicating high demand for short-term contracts. In fact, MCP's most active option was the weekly 6/13 2-strike put, where 9,090 contracts changed hands -- the majority at the ask price, suggesting they were bought. What's more, IV soared at the strike, and open interest spiked overnight, making it safe to assume the contracts were bought to open. Data from the ISE confirms this theory, as well.

By purchasing the puts at a volume-weighted average price (VWAP) of $0.06, the traders expect MCP shares to plummet from their current perch at $2.57 below $1.94 (strike less VWAP) by next Friday, June 13, when the weekly options expire. This represents unexplored territory for the equity. Additional gains will accrue with each step south of breakeven the stock is sitting at expiration. Conversely, the most the buyers stand to lose if the contracts expire out of the money is the initial premium paid.

On the technical front, Molycorp Inc (NYSE:MCP) has been reeling, losing 7% on Tuesday and down 54.4% year-to-date. In fact, just yesterday, the shares touched a record low of $2.44. Today, however, the equity is 2.4% higher, but considering its Relative Strength Index (RSI) of 22 is sitting solidly in oversold territory, a near-term bounce may have been in the cards.

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