Name That Trade – MCP: Dancing with Moly

by Dan May 29, 2014 9:34 am • Commentary
On Fast Money last night I was honored to offer a strategy to help Regis Philbin fix one of his investments that had gone terribly wrong. The stock is Molycorp (MCP), currently trading $2.90. For all intents and purposes, the stock, down 96% from the all time highs in 2011, and almost 50% this year alone, is an option.  To be fair I know little to nothing about rare earth mineral mining where MCP conducts its business but taking a quick look at a few inputs there does not appear to be too many reasons to sell at these levels if you didn’t think the company was gonna go bust.  But a turnaround could take some time, and I am not sure adding to an existing position to average in is a great use of capital, which is why I wanted to look to the options market for a trade that offered better break-evens on the downside, time to let the story play out, and the potential for a levered asymmetric return on the slightest bit of good news.
Watch the video here:

I want to make one more point, as expected with a stock that has gotten absolutely destroyed like MCP, SENTIMENT is HORRIBLE. Short interest is 42% of the float, analysts are very bearish with only 2 buys, 4 holds and 4 sells, and the two largest strikes of options open interest are puts with 28,000 Jan15 2.5 puts and 27,000 June 2 puts.
SO IF I WERE REGIS, and man I wish I was, the guy is a dynamo, I would think about taking the loss on a good portion of his long position, and look to replicate long exposure with no premium outlay.
HYPOTHETICAL TRADE: MCP $2.90 In Lieu of Buying Stock, Buy Jan 2016 $2/$4 Risk Reversal for even money
-Sell to open Jan16 2 Put at .70
-Buy to open Jan16 4 Call for .70
Break-Even on Jan16 Expiration:
Profits: Unlimited above 4
Losses: Put stock at 2, losses below
Neutral: btwn 2 and 4 no gains or losses.
Rationale- This stock has been absolutely destroyed and is now a pretty good risk reward set-up for a structure like this. The reward to the upside is massive and the stock can’t go below zero. (we think).  But the most important thing is that if it does go near zero, you have lowered your potential losses, and for that option you have given up some near term upside, but $1 on the upside is not likely to make a whole heck of lot of difference to Regis trying to make back his losses, unless he was going to load the boat down here, which would not really be sound risk management.
This is not a trade we are putting on but we will take a closer look at whats going on in the name and revisit the story after we have  better handle.