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Two Ways to Play Calls On Molycorp Inc (MCP)

Molycorp Inc call volume picks up ahead of earnings

by 4/24/2014 10:37 AM
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Option Brief: Calls were easily the options of choice on Molycorp Inc (NYSE:MCP) yesterday, trading at a 59% mark-up to the average daily volume, and outpacing puts by a more than 3-to-1 margin. While a number of speculators used calls bet on a positive end to the week, another group of traders took the non-traditional route to gamble on a slow churn for the rare earths producer over the next month or so.

Receiving notable attention on Wednesday was MCP's weekly 4/25 5-strike call, where 2,118 contracts changed hands -- mostly at the ask price, pointing to buyer-driven activity. Implied volatility shot 14.7 percentage points higher and open interest rose overnight, implying that new bullish positions were initiated. MCP closed right at the $5.00 mark last night -- and has moved slightly lower to $4.95 this morning -- but based on the volume-weighted average price (VWAP) of $0.09, breakeven at Friday's close is $5.09 (strike plus VWAP).

The most active strike in MCP's options pits once again was the weekly 5/23 5.50-strike call. However, the majority of the 4,314 contracts traded here did so on the bid side, signaling seller-driven volume. What's more, open interest rose the most of any other strike overnight, confirming the initiation of new positions. By writing these calls, the expectation is for MCP to remain south of $5.50 through the close on Friday, May 23 -- a time frame that includes the company's earnings report, tentatively scheduled for early May. In this ideal scenario, the options will expire worthless, and the traders can pocket the initial premium collected as their maximum potential reward.

On the charts, MCP has had a pretty rough go of things in 2014, with the shares off about 23% from their Jan. 3 year-to-date high of $6.45. More recently, the stock has struggled against the $5 mark since early March. Meanwhile, although the company's impending earnings results won't impact yesterday's call buyers, Wednesday's call sellers should note the equity has averaged a post-earnings single-session loss of 2.6% over the past eight quarters. Going out one week following Molycorp Inc's (NYSE:MCP) quarterly report, this loss widens to 9.7%.


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