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Molycorp Inc (MCP) Traders Gamble On Historic Lows

Option bears are targeting Molycorp Inc's deep out-of-the-money May 3 put

by 3/21/2014 2:14 PM
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Molycorp Inc (NYSE:MCP) put volume has spiked to more than four times the intraday average. Of the roughly 21,000 contracts on the tape, nearly half have crossed at the stock's deep out-of-the-money May 3 put, as it appears that speculators are banking on record lows for the shares in the not-too-distant future. The vast majority of these puts traded at the ask price -- mostly in a series of blocks just after noon ET -- suggesting they were bought. Also, volume at the strike easily trumps the 251 contracts in open interest, and implied volatility is trending higher, indicating new bearish positions are being initiated on MCP.

Based on the equity's current price of $5.03, purchasing the puts to open is a bold move. While Molycorp shares have already shed more than 10% year-to-date, they'd have to lose an additional 40.4% for the puts to land in the money by options expiration in May. What's more, the stock's all-time low is $4.51 -- still well above the strike price. As such, delta on the MCP puts sits at negative 0.077, representing a slim 7.7% chance of an in-the-money finish. Alternatively, it's possible that today's activity may be the work of shareholders hedging their long stock positions against a dramatic downturn in the security. But no matter what happens, the most these traders have at stake is the initial premium paid.

Fundamentally speaking, MCP is tentatively slated to report first-quarter earnings in early May. The shares have historically struggled in the wake of this event, shedding an average of 9.7% during the one week subsequent to the last eight earnings reports. This negative price action may help to explain some of today's put buying.

Taking a step back, Molycorp Inc (NYSE:MCP) puts have been the options of choice among traders in recent months, relatively speaking. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio rests at 0.40 -- up from 0.28 at the end of February. What's more, the current ratio is in the top quartile of all readings from the last year, meaning MCP traders have scooped up bearish bets over bullish at a faster-than-usual pace of late.


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