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Sparked by news that China may invest heavily in rare-earth products, Molycorp Inc (NYSE:MCP) surged more than 8% higher to its intraday peak of $7.78 on Tuesday and ultimately closed with a 1.4% gain. Against this backdrop, MCP options pits were active, especially on the call side. Roughly 40,000 calls changed hands, more than triple what is seen on an average trading day. By comparison, fewer than 9,500 put options traded.
Among the most active strikes was the weekly 9/27 8-strike call, which saw the biggest increase in open interest overnight, as more than 3,000 contracts were added. In Tuesday's trading, the majority of these positions traded off the ask price, and implied volatility at the strike jumped 8.8 percentage points. Collectively, this information suggests that new long calls were scooped up for a volume-weighted average price (VWAP) of $0.09.
Breakeven at Friday's close -- when these weekly options expire -- is therefore $8.09 (the strike plus the VWAP). Currently trading at $7.23, MCP has not closed north of the $8 level since late January, but if the calls remain out of the money at expiration, the call buyers will merely lose the premium paid. Based on the option's current delta of 0.13, the calls have a slightly better than 1-in-10 chance of muscling past $8 in the next three days.
There is also the possibility that some of these call buyers are hoping the $8 level continues to be resistance. More than 36% of Molycorp's float has been sold short, and it would take roughly 13 trading days to exit these bearish bets. While this provides the foundation for a short-covering rally on any pops higher in the shares, it also means that out-of-the-money call-buying activity could be the work of bearish bettors looking to hedge.
And for now, they are able to get that hedge fairly cheaply. Schaeffer's Volatility Index (SVI) for Molycorp Inc (NYSE:MCP) stands at 62%, which ranks lower than all but 15% of the past year's worth of readings. In other words, short-term options are priced cheaply, from a volatility perspective. During the last two weeks, however, the stock's 30-day, at-the-money implied volatility measure has increased to 62.8% from 56.7% on Sept. 11.
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