Cliffs Natural Resources Inc. (CLF) Bulls Place Ambitious Bet

Bulls are betting on big upside for Cliffs Natural Resources Inc (CLF)

by Josh Selway

Published on Apr 24, 2015 at 11:49 AM
Updated on Jun 24, 2020 at 10:16 AM

Cliffs Natural Resources Inc (NYSE:CLF) is cruising higher today with Chinese iron ore prices, and options traders want a piece of the pie. Call volume is through the roof, running at eight times the expected intraday volume, and outpacing puts by a factor of seven. It looks like bulls are buying to open the May 8 call, betting on a big upside move from CLF. With the shares last seen trading 4.3% higher at $5.80, they would need to add 38% by the close on Friday, May 15, for the options to be in the money.

Going back in time, CLF hasn't traded above $8 since late January. In fact, during the past three months, the equity has lagged the S&P 500 Index (SPX) by more than 20 percentage points. Still, call buyers can't get enough of the stock. During the last two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 8.78 calls for every put. This ratio is higher than all comparable readings from the past year, meaning call buying has been way more popular than usual.

However, there's a strong possibility that some of this call buying is connected to short sellers hedging. Over half of CLF's float is sold short, and would it would take almost seven days for bears to buy back these shares, at the security's normal daily trading pace.

Analysts certainly aren't believers. For instance, 87% of brokerage firms say CLF is a "hold" or worse. Plus, the shares have an average 12-month price target of $4.63 -- 20% below current levels -- with RBC reducing its price target to $6 from $7.50 just yesterday. Looking ahead, Cliffs Natural Resources Inc (NYSE:CLF) will report earnings next Tuesday.


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