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At Cliffs Natural Resources Inc's (NYSE:CLF) annual shareholder meeting today, Casablanca Capital LP came out the clear victor in its six-month proxy fight against CLF, by winning control of its board. Wall Street is cheering the news -- sending shares of CLF up 7.9% to $17.90. In the stock's options pits, overall volume has soared to nearly four times what's typically seen at this point in the day, but a number of speculators are betting on today's rally to run out of steam over the next several weeks.
Specifically, the most active CLF strike today is the August 17 put, where 5,717 contracts have traded -- mostly at the ask price, hinting at buyer-driven volume. Plus, implied volatility has shot 3.7 percentage points higher, and volume exceeds current levels of open interest, making it safe to assume new positions are being initiated.
By purchasing these now out-of-the-money (OTM) puts to open for a volume-weighted average price (VWAP) of $0.68, traders expect Cliffs Natural Resources Inc (NYSE:CLF) to be sitting below breakeven at $16.32 (strike less VWAP) at the close on Friday, Aug. 15 -- when front-month options expire. Profit will accrue on a move down to zero, while losses are capped at 100% of the premium paid, should the contracts expire OTM. At last check, delta for the puts had moved to negative 0.32 from negative 0.55 at last night's close, suggesting a less than 1-in-3 shot the puts will be in the money at expiration.