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Molycorp Shorts Get Pre-Earnings Jitters

MCP's weekly 11 call is the most actively traded strike in today's session

by 11/6/2012 1:26 PM
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Option traders are expressing a fondness for Molycorp Inc (NYSE:MCP - 9.93) calls today. More than 9,400 contracts have crossed the tape, representing an 18% rise from the average intraday volume for call options. Meanwhile, fewer than 4,600 put contracts have changed hands.

Short-term speculators have turned their attention to MCP's weekly 11-strike call, which has seen more than 3,500 contracts trade. The majority of these have crossed at the ask price, and volume is outstripping open interest, indicating new positions are being opened here today. By initiating these long calls, traders expect MCP to finish the week -- when the options expire -- above $11.11 (the strike plus the volume-weighted average price of $0.11). This represents an 11.9% premium to the stock's current price.

Expanding the scope, it seems today's activity in the options pits is par for the course for MCP speculators. During the past 50 sessions, traders have bought to open nearly four calls for every put. Plus, this call/put volume ratio of 3.70 ranks higher than 98% of other such readings taken in the last year, indicating calls have been scooped up over puts at a near annual-high clip in recent months.

This call-skewed trend is echoed among short-term speculators, as well. Specifically, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.66 ranks in the 19th percentile of its annual range. Simply put, traders have been more call-heavy than usual among options with a three-month shelf life.

When looking at MCP's technical backdrop, this campaign for calls is a bit puzzling. The stock has trekked a steady path lower for some time now, losing roughly 76% on a year-over-year basis, and around 59% in 2012 alone. Additionally, on a relative-strength basis, MCP has lagged the broader S&P 500 Index (SPX) by more than 25 percentage points over the past 60 sessions. The stock is currently staring up at two layers of overhead resistance in the form of its 10- and 32-day moving averages. These trendlines have put a lid on the equity's rally attempts since late September.

The general sentiment among investors outside of the options pits, however, tends to correlate with MCP's dismal technical backdrop. Short sellers increased their bearish exposure by 14.6% over the last two reporting periods, and short interest now accounts for almost half of MCP's available float. Coupling this with the company's impending earnings announcement -- scheduled for this Thursday evening -- the recent acceleration in call volume could represent short sellers picking up hedges against their pessimistic positions.

From a fundamental perspective, the rare earth oxide issue has a mixed history in the earnings confessional, falling short of bottom-line estimates in three of the last four quarters. For MCP's third quarter, Wall Street is calling for a per-share loss of 7 cents.


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