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Molycorp Inc (NYSE:MCP) shares have plummeted almost 18.3% today to hover at $5.80, after the company revealed plans to sell up to $200 million worth of common stock as it struggles to maintain cash flow. The stock has been added to the short sale restricted list, and as a result, puts are flying off the shelves, with roughly 45,000 contracts switching hands thus far -- about 19 times the intraday norm. By contrast, around 28,000 calls have been exchanged. Also of note, the security's 30-day, at-the-money implied volatility (IV) has spiked 9.2 percentage points to rest at 79.3%.
The clear front-runner is the October 5.50 strike, where about 20,000 puts have crossed at a volume-weighted average price (VWAP) of $0.19. Since this strike doesn't presently hold any contracts in open interest, the majority of the volume went off at the ask price, and IV has ticked higher since the opening bell -- it can be assumed that fresh bearish bets are being created here.
By purchasing the puts to open, traders are counting on MCP to retreat below the breakeven rail of $5.31 (strike price less the VWAP) by this Friday's close, when front-month options expire. This would entail a drop of 8.4% from the equity's current price, as well as a trek into territory last explored in late June.
According to the put's delta of negative 0.35, the market forecasts a 35% chance the option will move into the money ahead of the close on Oct. 18. (As of last night's close, the delta stood at just negative 3.3%.) Should MCP fail to backpedal below the strike price over the next few days, the most put buyers risk forfeiting is the initial premium paid. Also, the stock's Schaeffer's Volatility Index (SVI) of 73% ranks lower than all but 32% of similar readings taken during the past year, suggesting the security's near-term options are relatively inexpensive right now, even after today's increase in IV.
Molycorp Inc (NYSE:MCP) has struggled on the charts in 2013, shedding more than 38% year-to-date, and trailing the broader S&P 500 Index (SPX) by over 18 percentage points during the last three months. Adding insult to injury, the shares are now on pace to finish the week below their 32-week moving average for the first time since late August.
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