Monday, January 24, 2011

Rare Element Resources (REE) - Vol Pops Again

REE is trading $12.79, down 1.2% with IV30™ up 10.6%. The LIVEVOL® Pro Summary is below.


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I wrote abut the Rare Earth debacle on 10-28-2010. You can read that post by clicking on the title below:
MCP - China Owns Rare Earth and Won't Share it? Stock Drops, Vol Pops

On 12-28-2010, I wrote this:
Rare Element (REE) - China's Decision Moves Industry

Since I know no one will go there, here is the old news:

NEW YORK -- Shares of North American companies that mine rare earths jumped Tuesday in pre-market trading following China's announcement that it will cut exports of such materials by 11 percent next year.

China is the world's largest producer of rare earths, which are vital to manufacturing high-tech products such as cell phones, computer drives and hybrid cars. A drop in Chinese exports would boost demand for competing companies in the U.S., Canada and Australia.
Source: AP

From Fortune (full article Click Here):

Rare earth minerals... are materials produced largely in China (buzzword No. 1) for the sake of making techy things like Apple's (AAPL) iPad (buzzword No. 2) and green energy products like wind turbines (No. 3). As emerging markets economies (No. 4) expand, their citizens will buy more phones and TVs and hybrid cars and stuff. They will want, needless to say, to be just like us...
But with the world seemingly on the verge of a big trade war (No. 5), China is restricting exports of the rare earths -- which has sent their prices soaring and fueled investor interest in alternatives.

Brief History: China has blocked shipments of raw rare earth minerals to Japan since Sept. 21., and to the United States and Europe since Oct. 18.
(Source: NY Times)

10-28-2010: Chinese customs officials, without explanation, allowed shipments to resume to all three destinations.

I found this stock today using the IV30™ One Day Increase Scan. I've included the snap below.  One quick note, I can't find when earnings are for this company, so please do some howework on it if you want to trade it.

The REE Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 95.64
HV20™: 120.11
HV180™: 110.21

So, even at 95 vol, the IV30™ is depressed relative to the HV180™ (long-term realized) the HV20™ (short-term realized).

The Skew Tab snap (below) illustrates the vols by strike by month.

The skew looks pretty normal. I have highlighted the vol diff between the front month 14 line and the back two months. In particular, check out Apr.

Finally, let's turn to the Options Tab.

Possible Trades to Analyze
1. Trade the upside skew in a calendar:
a. Sell the Feb 14 call @ $0.60 (~87 vol)
Buy the Mar 14 call for $1.00 (~85 vol)
Pay $0.40.

b. Sell the Feb 14 call @ $0.60 (~87 vol)
Buy the Apr 14 call for $1.25 (~84 vol)
Pay $0.65 but get two months after Feb with the possibility of selling mar after Feb expo.

2. Naked vol purchase:
Wanna bet that the stock continues to move more than the implied?
Buy the Feb 13 straddle for $3.60.
I think I just threw up a little in my mouth.

3. Get long and take on some risk:
a. Buy the Mar 14 call for $1.00
Sell the Feb 15/16 call stupid (sell/sell) @ $0.60
Pay $0.40 for some upside potential and some upside risk (note that this is naked upside!). For the margin weary, here's an alternative:

b. Buy the Mar 14 call for $1.00.
Sell the Mar 15 and Feb 16 calls @ $1.00.
Buy the Feb 17 call for $0.15.
Pay $0.15, hope to get out of Feb with the stock near $15.

4. Trade the downside:
Since a stock can only go to zero, here's a risky play to the downside which sells skew but has a limited risk (at $0).
Buy the Mar 12 put for $1.60
Sell the Feb 10 put @ $0.40
Sell the Mar 10 put @ $0.70
Pay $0.50 for some downside with naked risk below $10.

This is trade analysis, not a recommendation.

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