Option Activity Alert: Rare Element Resources, Massey Energy

REE – Rare Element Resources Ltd. – Shares in Rare Element Resources Ltd., which has a 100% interest in the Bear Lodge property, rallied more than 19.2% today to secure a new 52-week high of $13.71. The Bear Lodge property contains one of the largest disseminated rare-earth deposits in North America and extensive gold occurrences, according to REE’s website. The sharp move in shares today attracted a number of options traders. Investors have exchanged 13,869 option contracts on the stock as of 3:30 p.m. in New York, which is a shade above the total level of existing open interest on REE of 13,690 contracts. REE’s shares have increased a staggering 391.4% since touching down at an intraday low of $2.79 back on August 19, 2010. The firm’s shares are up 649.1% since June 30, 2010, when shares traded at a 52-week low of $1.83. Investors expecting the firm’s shares to continue higher ahead of expiration day next month purchased approximately 1,500 now in-the-money calls at the November $12.5 strike – the highest strike price currently available on REE – for an average premium of $1.66 per contract. Call buyers are poised to profit should the price of the underlying stock rally another 3.3% over today’s high of $13.71 to surpass the average breakeven point to the upside at $14.16 by expiration. Other investors displayed an interest is November $12.5 strike put options where 1,900 lots were coveted for an average premium of $1.45 apiece. Perhaps these traders are attempting to lock in gains by purchasing downside protection. In this scenario, downside protection kicks in should Rare Element Resources’ shares decline 19.40% from today’s high to breach the average breakeven point on the puts at $11.05. Investors populating REE options during the session traded call and put options in roughly equal numbers.

MEE – Massey Energy Co. – Shares of the coal producer increased as much as 6.83% today, extending Tuesday’s rally, to touch an intraday high of $39.88 on speculation the firm may put itself up for sale. Massey’s shares jumped yesterday after the Wall Street Journal reported the coal supplier could potentially be acquired by a rival company or private equity firm. One options strategist reacted to the takeover chatter by purchasing a bull call spread in the January 2011 contract. The trader picked up approximately 2,500 calls at the January 2011 $40 strike for an average premium of $3.24 apiece, and sold the same number of calls at the higher January 2011 $50 strike at an average premium of $0.65 a-pop. Net premium paid to establish the call spread amounts to $2.59 per contract. The bullish player is prepared to make money should Massey’s shares surge 6.795% over today’s high of $39.88 to surpass the effective breakeven point at $42.59 by expiration. The investor walks away with maximum potential profits of $7.41 per contract if the coal producer’s shares jump 25.4% and trade above $50.00 by January expiration day. Interestingly, one analyst at FBR Capital Markets said in a note to clients that Massey Energy could be sold for $50.00 a share in a buyout scenario. The call spreader will bank maximum potential profits if such a sale should occur by expiration day next year. MEE’s shares were trading up around $54.80 at the beginning of April before an explosion at the firm’s Upper Big Branch mines in West Virginia took the lives of 29 people.

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.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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