Premium Buyers Find a Bargain On Cliffs Natural Resources Inc (CLF)

The options market is pricing in low volatility expectations for Cliffs Natural Resources Inc (NYSE:CLF) -- a potential boon for premium buyers

Jan 6, 2017 at 11:14 AM
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Call players have been active in Cliffs Natural Resources Inc's (NYSE:CLF) options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, speculative players have bought to open 37,457 calls on CLF stock in the last two weeks, compared to 5,831 puts. What's more, the resultant call/put volume ratio of 6.42 ranks just 12 percentage points from a 52-week peak, meaning CLF calls have been bought to open over puts at a faster-than-usual clip.

This call-skewed backdrop is seen in CLF's Schaeffer's put/call open interest ratio (SOIR) of 0.66, which ranks lower than 73% of all comparable readings taken in the past year. Simply stated, short-term speculators are more call-heavy than usual toward the stock. Plus, call open interest across all series is docked in the 98th percentile of its annual range, with 345,061 contracts outstanding. As a point of comparison, 251,052 CLF puts are currently open, in the 79th percentile of its 12-month range.

In the past 10 trading days, CLF's weekly 1/6 10-strike and April 10 calls have seen the biggest rises in open interest, with nearly 28,000 contracts collectively added. Per Trade-Alert, it looks like the majority of the activity at each out-of-the-money (OOTM) strike was of the buy-to-open kind, meaning traders are betting on a rally into double-digit territory by the respective expirations at tonight's close and the close on Friday, April 21.

However, CLF is a heavily shorted stock, too. Short interest climbed nearly 5% in the two most recent reporting periods, and now accounts for a whopping 24.4% of the stock's available float. As such, it's possible some of the recent rush toward long calls -- particularly those that are OOTM -- is a result of short sellers hedging their bearish bets against any upside risk.

Regardless of the reason, now is an affordable time to purchase premium on CLF's near-term options. For starters, the stock's Schaeffer's Volatility Index (SVI) of 65% rests in the 2nd percentile of its annual range, suggesting extremely low volatility expectations are currently priced into the stock's short-term options. Plus, CLF's Schaeffer's Volatility Scorecard (SVS) is docked at a lofty 99, indicating the options market has historically underpriced the equity's ability to make big moves on the charts in the past 12 months.

Technically, CLF has turned in a solid performance over the long term, up nearly 400% year-over-year. And while the stock has pulled back after notching a two-year high of $10.90 in early December, it found a foothold in the $8.40 region -- home to Cliffs Natural Resources Inc's (NYSE:CLF) late-July and early August highs, as well as a 61.8% Fibonacci retracement of its June low and December high.

clf daily since january 2016

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