Thursday, April 5, 2012

Molycorp (MCP) - Depressed Vol into Earnings; Lower Highs in Earnings Vol

MCP is trading $33.98, up 1.1% with IV30™ down 7.5%. The LIVEVOL® Pro Summary is below.


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Molycorp, Inc. (Molycorp) is a rare earth oxide (REO) producer in the Western hemisphere. The Company owns developed rare earth projects outside of China. The Company also owns rare earth oxide and rare metal producer in Europe.

I found MCP using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price GTE $7
IV30™ - HV20™ LTE -8 GTE -40
HV180™ - IV30™ GTE 7
Average Option Volume GTE 1,200
Industry != Bio-tech
Days After Earnings GTE 32

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol® Pro.

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20 simply because of a large earnings move.

The MCP 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).

The stock has seen a low of $23.46 and a high of $42.29 in six months, so, a rather large(ish) range. But, as the custom would indicate, this is a vol story. Several things I note:

1. The implied is well below the short-term (HV20™) and the long-term (HV180™) historical realized vols. Specifically:

IV30™: 53.25%
HV20™: 83.07%
HV180™: 82.36%

So, IV30™ is depressed relative to the short-term and long-term realized movement of the stock. I do note that the HV20™ appears to be a bit "artificially" elevated due to the large move on 3-8-2012.  The stock went from $25.98 to $30.89, or up nearly 19%.

2. The IV30™ is also depressed relative to its own annual history. The 52 wk range in IV30™ is [45.86%, 116.18%], putting the current level in the 10th percentile.

3. There's a pretty noticeable trend in IV30™, namely, down. I've included a larger image focusing on just the IV30™, but for the same horizon as above (six months).

I added that ever so helpful yellow arrow pointing out the down trend. Note how the last two earnings cycles  ("E" icon) have hit lower peaks.

Let's turn to the Skew Tab.

There's a noteworthy parabolic skew to MCP across all of those three expiries pictured. I checked he historical skew and there was a similar parabolic skew that emerged in MCP off and on, though the vols in the tails weren't quite as high (relative to ATM). Even with the depressed implied, the option market does reflect that the likelihood of both upside and downside moves is about equal (unlike "normal" skew).

One last note is that the next earnings date for MCP is likely in the May expiry (just a projection on my part), and that event risk is embedded in the May options -- and thus the higher ATM vol relative to the other two expiries pictured.

Finally, let's look to the Options Tab (below).

We can see May is priced to 56.68% vs Apr (monthly) priced to 51.56% vol. Again, that's probably earnings related. That 56% number would still be in the 14th percentile for IV30™ (annual).

This is trade analysis, not a recommendation.

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