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Molycorp Inc (MCP) Option Traders Bet On an Earnings Miss

Bearish bets have been popular on MCP

by 3/14/2013 9:47 AM
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With Molycorp Inc (NYSE:MCP -- 5.97) slated to take its turn in the earnings confessional after tonight's close, near-term option traders targeted the $6 mark on the stock on Wednesday. Specifically, MCP's March 6 call and put saw a respective 2,720 and 2,449 contracts change hands. The majority of contracts at the former traded at the bid price, while a healthy portion at the latter went off at the ask price. Open interest rose overnight, indicating the initiation of new positions, with the calls being sold to open and the puts being bought to open.

By selling the near-the-money calls, traders expect MCP to finish the week -- when front-month options expire -- south of the $6 mark. In this best-case scenario, the options will expire worthless, and the speculators can pocket the full potential profit of $0.25, which Trade-Alert indicated was the volume-weighted average price (VWAP). This could also be part of a covered-call strategy, in which shareholders are looking to increase their rate of return. However, should MCP muscle north of the strike by Friday's close, the investors may be required to deliver the shares for $6 apiece, no matter how high the stock might be trading.

Meanwhile, the in-the-money puts were purchased for a VWAP of $0.24. In other words, the speculators will begin to profit with each step south of breakeven at $5.76 (strike price less the VWAP) MCP takes through week's end. However, unlike the substantial risk associated with writing calls, the most Wednesday's put buyers have on the line is the initial premium paid.

Wednesday's bearishly skewed bias among traders highlights the withstanding trend in MCP's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.46 ranks higher than 73% of similar readings taken in the past year. Simply stated, puts have been bought to open over calls at an accelerated pace in recent weeks. Plus, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.82 falls in the 79th percentile of its annual range, suggesting short-term speculators are more put-heavy than usual toward MCP.

This pessimism isn't surprising, considering the stock has surrendered nearly 37% of its value year-to-date. Additionally, the equity is staring at a stern layer of overhead resistance in the form of its 20-day moving average. This trendline has been ushering MCP lower since early January.

As mentioned, the rare earths producer is scheduled to unveil its quarterly earnings results after tonight's close (the company announced a delay to the report in late February). For MCP's fourth quarter, Wall Street is calling for a per-share loss of 31 cents.


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