Name that Trade – $CLF Diving

by Dan February 2, 2015 12:03 pm • Commentary

Cliff Natural Resources (CLF), the beleaguered mining company, reports Q4 results tonight after the close. The options market is implying about a 9% one day move which is basically inline with the 4 qtr average (important to note though the stock rallied 22% following the Q3 report).

I am going to keep this short and sweet, because I have nothing to add on the fundamentals of a highly levered mining company, but I will say that the oversold nature of the stock (down 70% from the 52 week highs) and the high short interest (near 50%), horrible sell side sentiment (1 Buy rating, 12 Holds and 9 Sells) create an opportunity for an epic short squeeze on the slightest bit of good news.

[caption id="attachment_50499" align="aligncenter" width="600"]CLF 5yr chart from Bloomberg CLF 5yr chart from Bloomberg[/caption]

Short dated options prices reflect the strained nature of the equity, with 30 day at the money implied vol just off of the recent highs of 110% making long premium directional trades extremely hard to make money unless you get the direction, timing and magnitude of the move very correct:

[caption id="attachment_50500" align="aligncenter" width="600"]CLF 1yr chart of 30 day at the money IV from Bloomberg CLF 1yr chart of 30 day at the money IV from Bloomberg[/caption]

On January 8th there was a decent size buyer of upside calls in April (as we reported in our Notable post):

CLF – saw opening call buying,when stock was 7.16 a trader paid .38 for 17,000 April 10 calls.  Call volume was 2.5x average daily with total options volume about 1.5x average daily.

This strike is now the single largest strike of options open interest.  With the stock now 6.78, these calls are worth about 31 cents, with a break-even up more than 50%, these are nothing short of a lotto ticket now.  This sort of trade could be ok for a way to leverage an existing long position, but a hard way to speculate on a reasonable price increase in a short period of time.

If I were inclined to play for an oversold I would likely look to February expiration and look to capture a quick reversal and be out of the trade.  The Feb weekly 7 calls offered at .40 (stock reference $6.82) have a break-even at 7.40, up 8.5%, in line with the implied move. Another trade that looks ok if you are looking up would be the Feb regular expiration 7/9 call spread for a little less than 50 cents.  These are clearly speculative and if and when I do these types of trades in these situations I risk only what I am willing to lose as they are nothing short of gambling.

This isn’t exactly our cup of tea, but given the move in U.S. Steel post earnings we thought it looked like an interesting set up.