Option Activity Alert: Rare Element Resources, Materials Select Sector

REERare Element Resources, Ltd. – The Canada-based company that was the target of bullish options trading just 24 hours ago has transformed into a hub of bearish activity. Shares in Rare Element Resources, which own the Bear Lodge mine in Wyoming, fell as much as 27.05% from yesterday’s high of $13.71 to an intraday low of $10.00. Despite the substantial decline today the current price of the stock is still up roughly 260% since August 20, 2010, when shares were around $2.80 each. Pessimistic players took to the options field on REE to place bearish bets on the stock. Investors expecting shares to continue lower picked up put options and sold call options in the November and December contracts. Traders picked up approximately 2,500 puts at the November $10 strike at an average premium of $1.12 each, and purchased another 1,500 puts at the lower November $7.5 strike for an average premium of $0.37 apiece. Put buyers make money if REE’s shares slip beneath the average breakeven points at $8.88 and $7.13, respectively, by November expiration. Other traders sold 1,200 calls at the November $12.5 strike to receive an average premium of $1.07 per contract. Call sellers at this strike are indicating they do not expect Rare Element Resources’ shares to recover above $12.50 before the contracts expire next month. Investors short the calls keep the full premium pocketed on the transaction as long as the calls expire worthless. Pessimism spread to the December $10 strike where bearish investors scooped up 1,800 puts for an average premium of $1.42 a-pop. Put buyers make money if, by December expiration, the price of the underlying stock falls another 14.2% to breach the average breakeven point to the downside at $8.58. Options implied volatility on REE jumped 27.6% to 129.42% in late-afternoon trading.

XLB – Materials Select Sector SPDR ETF – The purchase of a plain-vanilla debit put spread on the XLB, an exchange-traded fund designed to correspond to the price and yield performance of the Materials Select Sector of the S&P 500 Index, indicates one option strategist is prepared for the price of the underlying fund to slip ahead of December expiration. Shares of the fund are currently up slightly by 0.05% to stand at $34.57 with 30 minutes remaining in the session. The investor appears to have purchased 10,000 puts at the December $32 strike at a premium of $0.56 each, and sold the same number of puts at the lower December $31 strike for premium of $0.38 apiece. Net premium paid for the transaction amounts to $0.18 per contract. Thus, the trader is prepared to make money – or realize limited downside protection – should shares of the XLB trade below the effective breakeven price of $31.82 ahead of expiration day. The investor is poised to amass maximum potential profits of $0.82 per contract should shares of the ETF plunge 10.3% from the current price of $34.57 to trade below $31.00 by December expiration.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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