Put Sellers Prey on McMoRan (MMR)
In last week's edition of Trading Tools, German auto giant Daimler AG (DAI - Analyst Report) was examined as it appeared on the Zacks Unusually High Option Volume stock screener. Utilizing the same filter today, a different security caught my eye: New Orleans-based oil and gas concern McMoRan Exploration Co. (MMR - Snapshot Report).
According to Zacks, put players pelted MMR on Thursday, with single-day volume soaring to nearly 19 times the norm. More specifically, the stock saw roughly 15,700 puts change hands, compared to its average daily volume of fewer than 900 contracts.
The bombardment sent the equity's Schaeffer's put/call open interest ratio (SOIR) – which measures options slated to expire within 3 months – skyrocketing overnight from 0.42 to a new pessimistic peak of 2.38.
Digging deeper into the data, we find that most of Thursday's options players honed in on MMR's May 5 put, which saw roughly 14,750 contracts cross the tape. This strike is now home to peak put open interest in the soon-to-be front-month series (April options expire after the close today), with 15,270 contracts in residence.
However, not all of Thursday's activity was bearish in nature. At 10:56 AM Eastern, a block of 13,650 May 5 puts changed hands at a bid price of 50 cents, suggesting they were sold. While put buyers hope the underlying stock's price will decline, a put seller is neutral-to-bullish on the stock. In this case, the put seller's goal is for MMR to remain above $5 before options expire on May 15, as the May 5 put would then expire worthless. This would allow the put seller to retain the entire premium received from the put sale.
But what makes the aforementioned trader so sure the shares of MMR won't decline within the next month?
He could be positioning himself ahead of the company's turn to pay the earnings piper. Unfortunately for the put seller, McMoRan hasn't performed well under the harsh rays of the earnings spotlight.
However, it's not just the aforementioned option trader who has high hopes heading into the firm's earnings release. Shares of MMR currently harbor 4 "buy" or better ratings, Zacks reports, compared to a lone "hold" and nary a "sell" in sight.
In conclusion, should McMoRan extend its streak of earnings disappointments, shares could take a hit. Plus, a discouraging earnings report or gloomy guidance from the firm could motivate the bulls in the brokerage bunch to reevaluate their positions. A round of downgrades and/or price-target cuts from this group could place additional selling pressure on the stock. And speaking of pressure, a May 5 put seller could also feel the heat should MMR fail to maintain its foothold atop the 5 level by May options expiration.