Option Bull Goes Big On Cliffs Natural Resources Inc (CLF)

Credit Suisse warns of a potential short squeeze in Cliffs Natural Resources Inc shares

by

Published on Oct 22, 2014 at 11:24 AM
Updated on Apr 20, 2015 at 5:09 PM

Cliffs Natural Resources Inc (NYSE:CLF) is up nearly 13% today at $9.63, after Credit Suisse warned of a potential short squeeze in the shares. Option bulls have responded, as volume has raced to double the usual intraday level.

A significant portion of the calls traded so far can be traced to a single individual. Specifically, a block of 7,930 weekly 10/31 7-strike calls was exchanged about 45 minutes into the session. It did so near the ask price (at $2.25 per contract), and implied volatility soared 39 percentage points on the transaction, collectively suggesting newly bought bullish bets.

Based on the above, breakeven at next Friday night's expiration is $9.25 (strike plus premium paid), meaning the aforementioned contract is already in profitable territory. Specifically, the bid price on the weekly call has spiked to $2.61 due to this morning's rally, which works out to a $0.36 profit per contract (or about $2,855 total).

It's worth noting that the weekly call encompasses CLF's next earnings report, due out next Monday afternoon. These events haven't always been kind to the shares. In fact, in the session following the company's July and April reports, the stock dropped 2.9% and 4.1%, respectively.

On a longer-term basis, Cliffs Natural Resources Inc (NYSE:CLF) has lagged the market significantly. Year-to-date, the equity is down 63.3% -- even after today's rally -- and has underperformed the broader S&P 500 Index (SPX) by more than 50 percentage points during the previous three months. Earlier this month, CLF also tagged a fresh 10-year low.


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