Cliffs Natural Resources Inc (CLF) Earnings Reaction Keeps Call Buyers On Edge

Cliffs Natural Resources Inc (NYSE:CLF) hit a new high post-earnings, but was last seen lower

by Karee Venema

Published on Jul 28, 2016 at 10:20 AM

Pre-earnings call players were active on Cliffs Natural Resources Inc (NYSE:CLF) yesterday, with a number of traders apparently purchasing new positions at the mining stock's weekly 7/29 8.50 strike. Out of the gate today, CLF stock jumped to a new annual high of $8.45, after the company's second-quarter results handily beat expectations. While the stock has since swung 0.8% lower to trade at $7.79, both Wednesday's call buyers -- and slightly longer-term options traders -- are hoping CLF stock resumes its uptrend.

Taking a quick step back, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been loading up on long calls over puts over the past month -- and getting a relatively good deal, too. In the past 20 sessions, specifically, CLF options traders have bought to open 50,847 calls versus 25,537 puts, resulting in a top-heavy call/put volume ratio of 1.99.

Echoing this call-focused backdrop is CLF's Schaeffer's put/call open interest ratio (SOIR) of 0.54. Not only does this show that call open interest nearly doubles put open interest among options expiring in three months or less, but it ranks in the 12th annual percentile. In other words, short-term speculators are more call-skewed than usual toward CLF.

Drilling down on the front-month series, peak open interest of 14,507 contracts is found at CLF's August 9 call. According to the major options exchanges, a healthy portion of these calls have been bought to open in recent weeks, meaning traders expect the stock to break out above $9 by front-month options expiration at the close on Friday, Aug. 19. CLF has not seen the north side of $9 since January 2015.

While some of this activity could be at the hands of "vanilla" option bulls, another portion could be of the hedging kind. Although short interest plunged 24.2% in the two most recent reporting periods, it still accounts for 34% of the stock's available float -- or 4.1 times the average daily trading volume. Simply said, short sellers may be initiating long calls to protect their bearish bets against any upside risk.

Looking at the charts paints a clearer picture as to why CLF short sellers may be a little nervous. The stock is up nearly fivefold on the year -- most recently due to some upbeat analyst attention. Regardless of where Cliffs Natural Resources Inc (NYSE:CLF) settles at options expiration, though, the most the call buyers stand to lose is the initial premium paid.

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