Molycorp Options Money with Calls Early and Now Puts page 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan 17, 2011

continued from page 1

You would have to trade the January puts since the lockup expiration occurred after the Decembers expired.  Going for the in the money puts (Jan 32 puts) on December 23, 2010 the trading day prior to the lockup expiration, those puts would have cost at most $3.60 and during that day traded between $2.30 and $3.60, closed or last traded at $3.00, and only 205 contracts traded.  On the lockup expiration day, four calendar days later because of Christmas those same puts traded at a high of $7.10. You should note that there was some time decay involved with the passing of four days before the market resumed for trading.

Pictured below is historical pricing view of Tesla Jan 32 puts

Option Pricing Historical Chart

If you use December 23rd's closing price of $3.00 and use the low price on December 27, then there was a gain of 50% to be had.  If you use the 27th's closing/ last traded price, then there was a 123%  gain and more if you had sold closer to the top and/or gotten in at the cheaper price.  There was a 10% decline in the stock one month prior leading up to the penultimate lockup expiration day which was then followed by the one day 22% drop in stock price.

Motorcity, Inc.'s (MOTR) lockup expiration date was December 15, 2010 and it lost over 21% from the prior day's high.  On December 14, 2010 MOTR traded as high as $22.47 and on December 15 it traded as low as $17.73.  One month prior to the lockup expiration in MOTR to the penultimate lockup expiry date the stock saw a steady decline of over 29%.

How did the MOTR options trade from pre lockup to lockup date? I had to use the January options for this example since I no longer have access to the December option pricing which would have left you three days to trade.  The at or very near in the money MOTR Jan $22.50 puts traded as high as $4.20 on December 14, 2010 with a range of $3.80-$4.20 for the day and a last price of $3.80 with volume of 122 contracts. On the following day, lockup expiration, those same Jan 22.50 puts traded for as much as $6.20, range of $4.90-$6.20, and last price of $5.50 with volume of 112.

Pictured below is a historical pricing view of MOTR Jan 22.50 puts

MOTR Historical Option Prices

Using a high to high for the two days would yield of almost 50% (47.6%).  If you had gotten in those same puts on the November 29, 2010 those same puts were trading around $2.00 with the stock trading as high as $31.39.  This was the second highest the stock ever traded on a day surpassed only by the $31.95 it reached on November 9, 2010 . The $22.50 Jan puts, which were far out of the money, purchased on November 29 quickly appreciated in price due to the steady decline in the price of the stock in a short period of time.  A more reasonable play may have been the just out of the money Jan 30 puts on November 29 and held until the lockup expiry would have seen a gain of $7.00 per option.

It is important to note that there has been a huge decline in the Implied Volatility of Molycorp's options in a period of a week.  On January 5, 2011 I made note that the implied volatility in MCP options was 112.  The volatility will shrink a bit as time marches on, but in the case of MCP options it went down to the high 70s which translated in a 30% drop.  

Molycorp traded as high as $62.80 on January 5th and the way out of the money Jan 50 puts traded for $1.15-$1.20 at the stock's all time high. One week later with the stock trading $8.00 a share lower using the high for the day, it traded as low as 51.67, the options went for as low as $1.45 due to the shrinking vol and time decay that was kicking in on the Jan put options.

One would think that with an $8 decline that those options would move more than just 15 even though they were still out of the money.  They did trade as high as $2.30 that same day since the stock fell just $1.67 from hitting the strike price. The next day it finally went into the money and traded as high as $3.30 with the stock at a 48 handle.

Those Jan 50 and 55 calls spooked me a bit since it could have meant someone knew something about a news release that would send the stock up again. I expect that the price will come down, but I am hoping that the volatility stays in if I decide to initiate a put position again.

We shall see.

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