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Molycorp Inc (MCP) Option Traders Expect the Rally to Fizzle

MCP skeptics are selling to open front-month call options

by 6/28/2013 1:17 PM
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The shares of Molycorp Inc (NYSE:MCP) are bucking the broad-market trend lower this afternoon, up 8.7% at $6.09, after the Securities and Exchange Commission (SEC) completed an investigation without recommending any enforcement action against the company. However, some options traders expect the rare earths producer to run out of steam in the short term.

So far today, Molycorp Inc (NYSE:MCP) has seen roughly 24,000 calls cross the tape, more than quadrupling the norm. Most active has been the July 7 call, which has seen almost 5,400 contracts change hands -- mostly at the bid price, suggesting they were sold. Plus, volume has exceeded open interest at the front-month strike, pointing to fresh initiations.

By writing the calls to open, the sellers expect MCP to remain south of $7 through the next few weeks. As long as the calls remain out of the money, the traders can pocket the entire net credit upon expiration, representing the maximum potential reward on the play. Should MCP extend its climb beyond $7, though, the sellers could be assigned.

From a broader sentiment standpoint, Molycorp is no stranger to skepticism. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.19 sits just 2 percentage points shy of a 52-week peak. In other words, short-term options speculators have rarely been more put-biased during the past year.

Echoing that, the security's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 0.56, in the 78th percentile of its annual range. In simpler terms, option buyers have purchased MCP puts over calls at an accelerated clip during the past two weeks.

Elsewhere, short interest jumped 9.9% during the past month, and now accounts for 34.8% of MCP's total available float. In fact, at the security's average daily trading volume, it would take nearly two weeks to buy back all of these bearish bets.

Should MCP extend today's upward momentum, an exodus of bears could add contrarian fuel to the fire.


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