Why Cliffs Natural Resources Inc (CLF) Could Have More Room to Run

Cliffs Natural Resources Inc (NYSE:CLF) has been rallying hard in 2016, but short sellers and analysts are not quite sold on the mining stock

by Karee Venema

Published on Dec 14, 2016 at 10:55 AM
Updated on Dec 14, 2016 at 11:03 AM

Cliffs Natural Resources Inc (NYSE:CLF) has been a technical standout in 2016, with the mining stock up over 500%. More recently, the shares pulled back after hitting a two-year high of $10.90 last Thursday, but found a foothold and bounced from the $9 region, home to their 20-day moving average and 2015 highs. In fact, CLF was last seen 4% higher at $9.68. And while options traders have been eyeing more upside for CLF stock, short sellers have been raising the bearish stakes -- suggesting there could be more fuel for the security's fire.

clf daily since december 2015

Taking a quick look at CLF's options pits shows speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 88,081 calls in the past four weeks, compared to 34,514 puts. What's more, the equity's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.52 suggests near-the-money calls nearly double puts among options set to expire in three months or less.

Drilling down, peak call open interest in the front-month series is found at the December 8 strike -- with 8,258 contracts outstanding -- most of which have been bought to open, according to data from the major options exchanges. In other words, call buyers are expecting CLF to settle north of $8 at this Friday's close, when standard December options expire.

clf december open interest

Outside of the options pits, however, traders have been growing skeptical of the mining stock. In fact, short interest rose 3.3% in the most recent reporting period -- and now accounts for a brow-raising 24.1% of the stock's available float. This pessimism is seen in the analyst community, too, where more than 71% of covering brokerages maintain a lukewarm "hold" rating on the outperformer. Plus, the average 12-month price target of $6.38 stands at a 34% discount to CLF's current price. Should the shares continue to rise, a capitulation among short sellers and/or a round of bullish brokerage notes could translate into tailwinds for the shares.

Lastly, now appears to be an affordable time to bet on Cliffs Natural Resources Inc's (NYSE:CLF) next move higher via options. For starters, the stock's Schaeffer's Volatility Index (SVI) of 69% ranks lower than 94% of all comparable readings taken in the past year, indicating low volatility expectations are currently priced into CLF's near-term options. What's more, the equity's Schaeffer's Volatility Scorecard (SVS) is docked at a lofty 99, meaning the options market has historically underpriced CLF's ability to make big moves on the charts over the last 12 months.

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