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Molycorp Bears Forecast a Continued Slide

MCP sees an uptick in November put-buying

by 11/12/2012 9:56 AM
Stocks quoted in this article:

The shares of Molycorp Inc (NYSE:MCP 6.75) plunged almost 16% on Friday, after the company revealed it is under investigation by the Securities and Exchange Commission regarding the accuracy of its public disclosures. Also not helping matters was the fact that MCP reported a third-quarter loss after Thursday's close. As such, approximately 67,000 puts changed hands during the course of the session, which was 10 times the norm, and nearly double the number of calls traded.

Garnering notable attention was the in-the-money November 7.50 strike, where close to 4,500 puts were exchanged -- most of them at the ask price, pointing to buyer-driven activity. These contracts crossed at a volume-weighted average price (VWAP) of $0.22. Open interest at this strike rose by 2,088 contracts over the weekend, hinting at the initiation of new positions. In order for traders to realize a profit from these bought-to-open puts, the stock must keep trekking south of $7.28 (strike price less the VWAP) prior to front-month expiration.

Friday's penchant for puts over calls was a stark contrast to MCP's recent trading activity. In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 3.04, confirming calls bought to open have more than tripled puts during the past few months. This ratio ranks higher than 80% of comparable readings taken during the past year, meaning traders have been scooping up calls over puts at an accelerated clip.

Likewise, Schaeffer's put/call open interest ratio (SOIR) for MCP checks in at 0.69, with calls comfortably outpacing puts among the front three-months' series of options. This ratio is docked in the 31st percentile of its annual range, indicating short-term speculators have been more call-heavy toward the equity less than one-third of the time during the past year.

However, short interest on the mining issue rose by roughly 15% during the last two reporting periods, and now accounts for a whopping 48% of MCP's available float. It would take nearly seven days to unwind these bearish bets, at the stock's average pace of trading. This implies that some of the recent buy-to-open call activity could be attributable to short sellers looking to hedge their positions.

Meanwhile, sentiment toward MCP is evenly split among the brokerage crowd, with three handing out "buy" or better ratings, versus three "hold" or worse recommendations. Still, the equity's average 12-month price target of $16.71 reflects some pretty lofty expectations, as it represents a 123% premium to Friday's closing price of $7.50.

MCP has been struggling on the technical front lately, having surrendered more than 79% during the past year, and over 70% year-to-date. The security has also trailed the broader S&P 500 Index (SPX) by nearly 38 percentage points over the past three months. On the charts, the stock continues to trade below its 10-week moving average, which has acted as resistance since late April. Should the shares continue to sink, the aforementioned bears could end up securing a profit prior to November expiration this Friday.

At last check, MCP has surrendered another 10% to tag a new record low of $6.68.


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