There’s a saying which states the market is always right. While that might be true, it’s also quite easy for a new truth to emerge rather quickly and one which flies in the face of current expectations. One name which has this sort of look to it is rare earths and current well-out-of-favor play, Molycorp (MCP).
In front of this evening’s earnings release, shares are off just more than 60% from last spring’s all-time and “It’s going to the moon!” highs. Bulls can and have blamed the stock’s technical short-comings of recent months to increased levels of supply for its mined specialty metals, as well as lesser end user demand. That may be true and the latest investor update from the WSJ Online proclaimed as much just today.
Nonetheless and knowing how prices and investor expectations tend to overshoot often enough, Molycorp’s earnings to act as a bullish catalyst on its share price seems an interesting one. This opinion is made a bit more compelling after pulling up a weekly chart which shows MCP breaking through one longstanding downtrend line while confirming a lower-high, double bottom pattern. This is shown and annotated in Figure 1 below.
Figure 1: Molycorp (MCP) Weekly Chart
Being a reasonable and pragmatic person and one focused on opportunities in the option market, the technical setup for a bullish position becomes more provoking as Molycorp sports both Weeklys and regular options. Not only that, liquidity is quite strong with more than 10,000 contracts changing hands on average. Coupled with reasonable quoted markets and one point wide strike distances, traders so willing, can think about designing tailor-made strategies ranging from the simple to those more complex three and four-legged positions.
A quick but not entirely correct visual of MCP’s premiums reveals prices to be very cheap in front of the report. Shown in Figure 2, since the company came public, option prices look to be, on a percent IV basis, as cheap as they’ve been in front of an earnings report. However, what this view hides are prices for the Weeklys, which are the pure play for the event.
Investors actually have a choice right now between Friday’s expiring February Weeklys and next Friday’s March Weeklys 1 contract which comes off the board the following week. Not surprisingly, with implieds having less punch per point so close to expiration, prices in those two contracts are looking much stiffer in percentage terms with the February at-the-monies nearing 200% IV and the March bid into the mid-80s.
Figure 2: Molycorp (MCP) Historic Implied Volatility
Given everything that’s been said and based on our observations, I see the use of short term verticals as one way to position with a bit more confidence than otherwise. Bulls and bears might always disagree with our outlook for shares come this evening. But with guaranteed risk controls and allowing for a small percentage of capital allocated towards this sort of still riskier-than-normal position; the poor man’s collar looks to be all the more dynamic for a play on earnings when anything can happen.
Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
