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Author: PaulEngr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 11007  
Subject: Possible call option MCP Date: 8/5/2012 11:50 AM
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First off, let me just say that MCP (MolyCorp) is definitely NOT a stock to be in for the faint hearted. In 2 months time I watched my holdings go from $33 to $40. Then in a matter of days it went from that to $65 at which point I bought a protective put. Then it went to over %70, then plunged all the way back to $48. Needless to say I breathed a sigh of relief for having bought an insurance policy. This kind of price move is not unusual for MCP. So in some ways it's almost to the level of playing around with highly leveraged (ATM) puts and calls.

Just recently it plunged from around $17 to $11.50 much to my dismay. It's not that I won't hold onto what I have. It's just that these kinds of things are somewhat aggravating on the stomach if you know what I mean. Now how I'm thinking of responding to this...more back story.

The back story is this. MCP is a mining company that started out by going back and redeveloping/restarting/rebuilding a site in California to produce rare earth metals. For those not in the know, rare earths are a group of metals that are the last two rows on the periodic table. Chemically they are all ALMOST identical...almost, but not quite. Most are radioactive to one degree or another because on an atomic level, their nucleus's are so large and unstable that it is fairly easy for them to fly apart given a little push from a stray neutron or two...so plutonium, uranium, cesium, thorium, and americium (the most popular radioactive metals) are all rare earths. At the same time they go into the most mundane applications. The "flint" on a typical disposable lighter is actually coated with a material called "mischmetal" which is a polite way of saying that it's a conglomerate of whatever rare earths are available cheaply at the time since rare earths are again, almost chemically identical.

Certain ones however have absolutely amazing properties outside of this. For instance, cerium causes major radical changes in metal chemistries. Ductile cast iron is a revolutionary "new" (circa 1960's) form of cast iron that has the toughness of steel strength of cast iron. Most of it is made of about 95% scrap metal. Adding 0.005% to it controls detrimental effects of certain contaminant elements such as lead and reduces the need for much larger amounts of magnesium. Effectively it is difficult to produce good quality ductile iron without it.

It is also the catalyst used to convert CO into CO2 in automobile catalytic converters, it makes self-cleaning ovens do their thing, helps prevent fading in pigments, helps prevent clear polymers from turning dark, and is often used as the basis for rare earth (super strong) magnets.

OK, and Cerium is one of the more common of the "rare earth" metals, and one of the more popular ones for the reasons stated above, but there are many more of these rare metals that have various fascinating uses.

Starting about 3 or 4 years ago China kept making noise about capping exports. Overall from an outside perspective it looks to me like some Chinese folks are playing a game of insider trading but that's another story.

Overall before they went acquisition crazy, MCP was worth about $30-$35. It is hard to value them at this point with so many fingers in so many pies but so far it looks like if you look at their individual businesses, they have not diluted themselves down to much worse than around $25-$30.

When they first started "producing" by draining off material that had been laying in thickeners (think large, flat "tanks" if you don't know) and getting some material on the market quickly. The site wasn't actually supposed to go into production until the end of this year. The moment that they started "going positive" on the production front, the market went nuts and at one point the stock was North of $70. That's on top of the yo-yo'ing that the stock price does every time a Chinese official comes out with yet another proclamation. In some ways this is sort of like the whole European economy issue on steroids.

So now we come to the current period. The California operation just started into production "for real" this time. They completed another acquisition of a Canadian operation. And there are some other activities surrounding them. So needless to say with pulling off what is effectively two major startup operations simultaneously, their quarterly report was pretty abysmal. The "street" promptly trounced and cut them to the current $11.50 when this news was coupled with more noise out of China and the current European scare.

At least that's my view point. Needless to say I'm a bit concerned that it may drop further and that the recent acquisitions have driven it off a cliff similar to what Cisco has done to themselves over the past couple years. BUT...I don't see anything in their acquisitions to deserve a 50% hair cut other than the fact that the "Street" has dropped anything resembling risk lately in the flight to safety.

Now the "safe way" out of this is to buy MCP at $11.50 and sit on it. But I was thinking of something else entirely. MCP December $10 call is running $1.80. That's just $0.30 of time value over the current price after it plunged to $11.50.

If I'm right about MCP it is unlikely to go much lower. Still giving myself a 10% margin here but hey for this stock, that's a pittance. If it goes lower than $10 and stays there, I bag a big, fat zero. If it floats between there and around the current stock price, I lose a lot of principle but not much. BUT if it goes above $12, I'm highly leveraged here and make out really good.

Am I missing something here with regards to the underlying stock? And just why isn't the time value much higher for that matter? Is this really as good as it looks? I've gotten burned before so many times on buying calls (and since it's a tax sheltered account I normally use for these things, I'm restricted from selling puts). But this is the first really good looking call I've seen in a while.
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Author: Tachino Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10916 of 11007
Subject: Re: Possible call option MCP Date: 8/5/2012 12:34 PM
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A December 12 call has a 37% chance of being in the money on expiration, I believe that is roughly the chance that MCP will be 12 or greater on expiration, meaning you have a 63% chance that MCP will be below 12 on expiration. Only reason I mention the 12 call is because I believe MCP needs to be 12 or greater by expiration for the December 10 call to be profitable.

Do not think you are missing anything. Very nice review of MCP. Thanks.

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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10917 of 11007
Subject: Re: Possible call option MCP Date: 8/5/2012 3:07 PM
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Tachino pretty much says it all - long calls are generally a bad bet and rarely pay off unless the stock makes a big move relatively quickly. Also, when a stock is beaten down like this the IV tends to be high, making calls expensive. When the stock goes back up, IV tends to go down, which hurts the value of the long call. In cases like this you can see the stock move up but still lose money on the call.

Buying a long call as a speculative bet could work, but keep your position small. Another approach could be to sell a short put. It has a limited reward, but a higher chance of success

Paul

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10918 of 11007
Subject: Re: Possible call option MCP Date: 8/5/2012 3:43 PM
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In my view, buying calls is closer to gambling than to investing. MCP is a falling knife and below IPO ($13.25?). The market is totally psychotic at the moment. If I were accumulating MCP I would look for a safer way.


MCP December $10 call is running $1.80. That's just $0.30 of time value over the current price after it plunged to $11.50.

That's not what Ameritrade is showing. On Sunday at 03:08 PM EDT it shows:

Dec 10 2.80 2.87
Dec 11 2.27 2.33
Dec 12 1.84 1.90
Jan 10 2.95 3.05
Jan 11 2.40 2.54
Jan 12 2.02 2.11

The safer way, for me, would be to buy the shares and sell covered calls for an extra discount. For example, buy MCP at 11.50 and sell 12 Jan 2013 at 2.05. You are giving yourself an extra 17.8% discount and if called you make $2.55 on $9.45 out of pocket, that's 27% in less than six months. Want a better chance of not being called? Sell the $13 or the $14 strike price ($1.70 $1.40).

I follow MCP as background for my two junior rare earth miners. These news are scary:

Molycorp shares hit all-time low on funding woes
Shares of rare earth minerals miner Molycorp hit all-time low on warning of funding shortfall

Associated Press – Fri, Aug 3, 2012 12:14 PM EDT

NEW YORK (AP) -- Shares of Molycorp Inc. fell to an all-time low Friday after the rare earth minerals mining company said it will need to secure additional financing to cover a substantial portion of capital expenditures and other cash requirements this year.

THE SPARK: The Greenwood Village, Colo., company said late Thursday that cash flow from operations will be less than anticipated this year. It is in negotiations with respect to financing, including potential equipment leading, asset-based revolving credit facilities and other debt arrangements.

"We cannot assure you that we will be able to obtain any financing on commercially acceptable terms or at all," Molycorp said in a statement.

The announcement came as Molycorp reported a loss of $67.6 million, or 71 cents per share, for the April-through-June quarter. That compared with net income of $47.8 million, or 53 cents per share, a year ago. Revenue rose 5 percent to $104.6 million.


http://finance.yahoo.com/news/molycorp-shares-hit-time-low-1...

I don't follow MCP close enough to know if this is fact or cover your back lawyerly advice but I would check their liabilities before buying more shares. Also, the long term rare earth charts don't show the various stocks as having bottomed yet.

Denny Schlesinger

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Author: ww4321 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10919 of 11007
Subject: Re: Possible call option MCP Date: 8/6/2012 10:05 AM
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Buying a long call as a speculative bet could work, but keep your position small. Another approach could be to sell a short put. It has a limited reward, but a higher chance of success

Paul
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I am curious as to what general type of option strategies you and others like now.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10920 of 11007
Subject: Re: Possible call option MCP Date: 8/6/2012 10:50 AM
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I am curious as to what general type of option strategies you and others like now.

Selling cash secured naked puts and selling covered calls depending on a series of factors too long to list but resulting in positions that meet my parameters for safety, yield and liquidity. Generally speaking the puts do better on rebounds from the bottom and calls do best with flat lining stocks.

Denny Schlesinger

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Author: rharmelink Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10921 of 11007
Subject: Re: Possible call option MCP Date: 8/6/2012 8:47 PM
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Selling cash secured naked puts and selling covered calls depending on a series of factors...

What I find interesting is that most people I talk to on the options discussion boards that do both strategies choose different strike prices for each strategy, even though they are more or less the same thing at any given strike price.

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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10922 of 11007
Subject: Re: Possible call option MCP Date: 8/13/2012 2:47 PM
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What I find interesting is that most people I talk to on the options discussion boards that do both strategies choose different strike prices for each strategy, even though they are more or less the same thing at any given strike price

The risk profile and max loss for the two positions are the same - cost of the stock minus commission received, but people use different strike prices for the covered call vs. naked put because generally you want to sell the closest OTM call or put. In almost all cases the closest OTM call is at a different SP than the closest OTM put.

Paul

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Author: rharmelink Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 10923 of 11007
Subject: Re: Possible call option MCP Date: 8/13/2012 7:23 PM
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The risk profile and max loss for the two positions are the same - cost of the stock minus commission received, but people use different strike prices for the covered call vs. naked put because generally you want to sell the closest OTM call or put. In almost all cases the closest OTM call is at a different SP than the closest OTM put.

I generally choose the first OTM strike price for the call -- BECAUSE it means I can earn more profit if the stock price goes up. An OTM put won't do that -- your only profit is from the option premium.

And, in general, I would expect the stock price to go up, because I would only do a CC/CSP on a company I felt is a good one.

So I'd rather do the ITM put for the same reason I did the OTM call. It's just that the put gives me the extra money ahead of time, before the (hoped for) price increase.

Typically, I put a $0.03 limit order in to buy back the call/put, since there would be no time value left in the option and it would signal it's time to go to different strike price/expiration date.

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