Tuesday, December 28, 2010

Rare Element (REE) - China's Decision Moves Industry

REE is trading $14.33, up 22.2% with IV30™ up 20.2%. The LIVEVOL™ Pro Summary is below.

REE engages in the acquisition, exploration, and development of mineral properties primarily in Canada and the United States. The company primarily focuses on gold and rare-earth-elements.
Source: Yahoo! Finance

Here's the news:
NEW YORK -- Shares of North American companies that mine rare earths jumped Tuesday in pre-market trading following China's announcement that it will cut exports of such materials by 11 percent next year.

China is the world's largest producer of rare earths, which are vital to manufacturing high-tech products such as cell phones, computer drives and hybrid cars. A drop in Chinese exports would boost demand for competing companies in the U.S., Canada and Australia.
Source: AP

So the vol and stocks are popping across the board in this industry (see also MCP). REE has traded over 33,000 contracts today in the first 2 hours on total daily average option volume of just 7,431. Calls have traded on a nearly 4:1 ratio to puts. The Stats Tab is included (below).

The Options Tab (below) illustrates the action in Jan. The Jan 14, 15 and 16 calls are mostly opening (compare OI to trade size).

The Skew Tab snap (below) illustrates the vols by strike by month.

A weird lookin' skew for sure. Jan has some upside skew, Feb doesn't. Finally, the Charts Tab is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock pop today. It is interesting to see the IV30™ just now rising passed the short-term and long-term realized vols. It looks like vol was a purchase yesterday... brilliant!

Possible Trades to Analyze
I don't know enough about this China decision to really make any trades, but here are some things I see, maybe you know more about it than I do:

1. The stock has shot passed it's 52 wk high (was $14.00), but the upside calls in Jan do look kinda pricey. The Jan 17.5 calls are $0.40 bid. The Jan 16 calls are $0.70 bid and the Jan 15 calls are $1.05 bid.
A buy write:
Buy 100 shares REE $14.33
Sell 1 Jan 15 call @ $1.05.

2. If you want to sell this rally, since the stock has moved $2.60 today, it feels like the 98 vol in the 12.5 puts might actually be cheap.
A put spread:
Buy the Jan 11/12.5 put spread for $0.45.

3. Calendar spreads are a possibility, especially the upside kind, Feb vol is below Jan and the skew bends the right way as of right now to sell Jan to fund Feb on the 16 line.

This is trade analysis, not a recommendation.

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