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Molycorp Option Players Eye a Continued Rebound

MCP's weekly call options were in favor on Friday

by 11/26/2012 10:13 AM
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Calls were popular on Molycorp Inc (NYSE:MCP - 9.06) on Friday. Roughly 38,000 contracts crossed the tape in the abbreviated session, or more than double the average daily volume for call options. By comparison, around 12,000 put contracts traded hands, on pace with the expected daily put volume.

Weekly calls were in focus, with traders paying particular attention to MCP's 8- and 9-strike calls, which will expire at the close this Friday. Of the respective 1,829 and 3,574 contracts traded, the majority at each strike crossed at the ask price, and open interest rose over the weekend -- two indications of buy-to-open activity. By initiating these long calls, speculators will profit with each step north of $8.45 (the 8 strike plus the volume-weighted average price [VWAP] of $0.45) and $9.22 (the 9 strike plus the VWAP of $0.22) MCP takes through week's end, respectively.

Expanding the scope, it seems Friday's preference for calls was another day at the office for option players. In fact, over the course of the past 20 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 184 calls for every 100 puts. Additionally, MCP's Schaeffer's put/call open interest ratio (SOIR) of 0.69 ranks in the 34th percentile of its annual range, suggesting short-term speculators are more call-heavy than usual toward the stock.

This campaign for calls is a bit puzzling, given the stock has surrendered nearly 62% of its value on a year-to-date basis. In addition, the equity has lagged the broader S&P 500 Index (SPX) by more than 24 percentage points during the past two months, on a relative-strength basis. However, the recent bullish development in the options pits may have been prompted by MCP's 56% rebound since hitting a record low of $5.75 on Nov. 16. The stock is still staring up at resistance from its 32-day moving average, which has not been surmounted on a daily closing basis since Sept. 26.

In light of this technical turnaround, this uptick in call activity may also represent short sellers picking up hedges on their pessimistic positions. Short interest rose 4.7% during the last two reporting periods, and now accounts for nearly half of the equity's available float. Plus, the stock breached its lower Bollinger Band on Nov. 14, suggesting a short-term bounce from oversold territory may have been in the cards.

In today's session, the stock jumped more than 5% right out of the gate, and was last seen hovering near $9.06.


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