Molycorp (MCP) Takes a Breather

April 3, 2011, 11:38 am

After a slow start, the bulls have managed to push the major indexes higher despite some negative headwinds. Futures were pointing towards a lower open after another debt downgrade of Portugal and the bulls were looking weak after getting some disappointing economic news. Shortly after the bell, the ISM Services Index for March came in at 57.3 versus expectations for a print of 59.5.

The bears also threw a negative housing report, another interest rate increase in China and the kitchen sink at the bulls but it hasn’t worked today. The market continues to ignore these hurdles and is slowly grinding higher which could lead to a better-than-expected earnings season.

Molycorp (MCP, $65.30, down $1.11) is down slightly today following yesterday’s 12% surge. We have received a lot of emails over the past couple of days on this name so we thought we would do a general email to get everyone into the loop.

On March 4, we listed a strangle option trade on Molycorp for our Watch List and here were our thoughts when the stock way just under $50:

“A break/close above $50 gets shares rolling again. A break below $45 is trouble. We have listed a straddle option trade for this one as we wait for a breakdown or breakout.”

Shares of Molycorp broke below $45 in mid-March and touched a low of $42 by St. Patty’s Day. Shares stayed in the $42-$44 range for a week and on March 22, they jumped nearly $8 on earnings and closed above $52. As you can see, we had the targets right but shares gapped down then gapped up before we had a chance to enter positions. Some of our subscribers pulled the trigger and are now sitting on monster gains.

The April 55 calls (MCP110416C00055000, $10.20, down $1.10) were going for $2 at the time while the April 42 puts (MCP110416P00042000, $0.05, flat) were going for $1.20. The puts easily doubled when shares reached a low of $42 and could have been closed for a triple-digit return.

However, these is the pure beauty of strangle option trades. Sometimes BOTH sides of the trade can return triple-digits. The April 55 calls are up over 400% since we profiled them. Even if the puts expire worthless or if you are still holding them, the trade is still up 200%.

Although we haven’t had an “official” strangle recommendation for 2011, yet, there are a bevy of stocks setting up for breakouts or breakdowns. Another reason we haven’t added these types of option trades to our portfolio is because our trading plan has been bullish. Remember, in November 2010, we said the rally could last until April so here we are.

Our plan was to stay long call options from October thru April. Then in May, sell and go away, which means we would be looking at put options as we head into the summer doldrums. Of course, every market is different but we always try to have a plan and look at charts for 6 months out. The bullish signals we got in October haven’t let us down although the 5-week trading range threw us off track.

We will be listing a few more strangles trades over the next few weeks so watch them closely. We have done extremely well paper trading strangles during this range and we have profiled them to teach our new subscribers how they work.

We have a lot more to talk about in our Members Area as some of our current trades are on the move.

As we head to press, the Dow is up 25 points to 12,425 while the S&P is higher by 4 points to 1,337. The Nasdaq is showing a 15 point pop and is at 2,804…a good sign.

We will be back in the morning with a full update.

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