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Molycorp Inc (MCP) Attracts a Bearish Near-Term Following

Traders forecast new all-time lows for MCP

by 6/18/2013 2:20 PM
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Bearish speculators have taken a shine to Molycorp Inc (NYSE:MCP) today, as approximately 11,000 puts have crossed the tape thus far. This is more than three times the equity's expected intraday put volume, and about double the number calls exchanged. By the looks of it, most of these traders are counting on the rare earths miner to sink to new record lows in the near term -- a notable change from last week's activity in the options pits.

Leading the pack is the out-of-the-money August 3 strike, where close to 5,000 puts have changed hands at a volume-weighted average price (VWAP) of $0.12. Around three-quarters of these contracts traded at the ask price, signaling buyer-fueled volume. Additionally, today's volume has exceeded current open interest levels, and implied volatility was last seen 3.2 percentage points higher -- underscoring out theory of newly added bearish bets. In order for speculators to secure a profit from their bought-to-open puts, MCP must retreat south of the $2.88 level (strike price less the VWAP) by August expiration. This represents a drop of about 48.7% from the equity's present price of $5.61, as well as uncharted territory.

Also receiving notable attention is the July 4 strike, which has seen close to 1,800 puts exchanged -- the majority of them at the ask price, suggesting they were purchased. Meanwhile, this strike holds open interest of just 1,298 contracts, and implied volatility has surged 8.4 percentage points since the opening bell, again signaling the initiation of fresh positions. In this case, traders are wagering that the equity will fall below breakeven at $3.92 (strike price less the VWAP of $0.08) by the close on July 19. The delta for this option is docked at negative 0.096, indicating it has a less than 1-in-10 chance of finishing in the money.

As alluded to earlier, this campaign for puts over calls marks a change of pace for the stock. In fact, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 162,956 MCP calls during the past 10 weeks, versus 46,293 puts. The resulting 50-day call/put volume ratio of 3.52 is just 4 percentage points shy of a 12-month peak, meaning traders have been snapping up bullish bets over bearish at a near annual-high clip.

This overall upbeat attitude toward Molycorp Inc seems rather unusual, given the stock's year-to-date loss of more than 40%, along with its year-over-year loss of almost 72%. On the charts, the equity continues to trade below its 10-day moving average, which has served as resistance since mid-May. Still, even if the security fails to breach the aforementioned strikes, the most today's bears risk losing is the initial premium paid for their put purchases.


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