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Molycorp Inc (MCP) Option Bulls Reeling on Earnings Miss

Why yesterday's Molycorp Inc call buyers may be hurting this morning

by 5/8/2014 10:36 AM
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Option Brief: For the second day in a row, Molycorp Inc (NYSE:MCP) has touched an all-time low, largely thanks to its disappointing first-quarter results announced last night. At last check, the shares were down more than 12% at $4, after bottoming out at $3.86. As such, the rare earths name has landed on the short-sale restricted list. In yesterday's options pits, however, traders wagered on out-of-the-money calls in order to gamble on -- or possibly hedge against -- a potential post-earnings pop.

Delving into the details, 8,733 contracts were exchanged at MCP's May 5 call during the course of Wednesday's session. The majority crossed the tape at the ask price, implied volatility surged higher at the strike, and open interest picked up more than 7,000 positions overnight. Considered together, it's safe to assume the calls were bought to open.

As alluded to earlier, the traders likely had one of two possible goals in mind. On the one hand, they may have expected MCP shares to mount a post-earnings rally past the 5 strike by next Friday's close, when the front-month options expire. On the other, the buyers may have been short sellers hedging against such a scenario -- after all, nearly 38% of the stock's float is sold short, which would take approximately four weeks to cover, at the equity's average daily trading volume. No matter what the strategy, the most these individuals have on the line is the initial premium paid.

Given Molycorp Inc's (NYSE:MCP) skid this morning, it's looking increasingly unlikely that the aforementioned contracts will finish in the money. Specifically, delta on the option has plummeted to 0.063 from 0.27 at last night's close.


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