Options Update: Call Activity on The Mosaic Company Ahead of Earnings
On Wednesday, October 1, The Mosaic Company
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PowerRating) is slated to slip into the earnings confessional to release its fiscal first-quarter earnings report.
Analysts are currently expecting a profit of $2.93 per share from the fertilizer specialist, a vast improvement over last year’s earnings of 64 cents per share. Historically speaking, MOS is no fundamental slouch, besting Wall Street’s estimates in each of the past 4 reporting periods by an average of 17%.
But the question for MOS is not whether the company will meet or beat analyst forecasts so much as it is whether the firm will live up to investor expectations. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.45 indicates that calls more than double puts among near-term options.
Furthermore, this ratio ranks below 98% of all those taken during the past year, indicating that speculative traders have been more optimistic toward MOS only 2% of the time in the prior 52 weeks. This spike in bullish sentiment ahead of the event could mean that better-than-expected earnings are already baked into the stock’s sentiment backdrop.
Complicating matters further, options traders are extending their preference for calls into today’s session. Some 8,900 calls have already crossed the tape for MOS so far today, doubling the stock’s average daily call volume and placing the equity on today’s Intraday Volume Explosion List. The majority of this volume has changed hands on MOS’s October 100 call, catching my eye this afternoon.
There is an interesting split in today’s volume that I thought I would point out before diving into the usual trading example. Notice on the chart above that most of the apparent call buying (or block trades crossing at the ask price) occurs near 10:50 a.m. Eastern, while the call selling (or block trades crossing at the bid price) takes place after 11:30 a.m. As you can see from the intraday chart below, the call buying occurred when MOS was poised to rebound back above round-number resistance at the 90 level. However, the call selling picked up when the shares were ultimately rejected by this overhead resistance. From 11:30 a.m. onward, you can see MOS pick up steam in its decline on the day.
The Anatomy of a MOS Call Position
Turning to today’s trading example, I am running with the idea that our hypothetical trader at 12:21 p.m. sold (to open) 204 MOS October 100 calls for $4.50. Keep in mind that volume at this strike does not exceed open interest, so we could be looking at the closure of existing positions, which would be expected given that the stock breached long-term support at the 90 level. That said, I am pressing forward with the call-selling example.
Specifically, in this situation, the trader sold 204 MOS October 100 calls for $4.50, or a total credit of $91,800 — ($4.50 * 100)*204 = $91,800. Remember, in a call sell position, a trader needs the underlying stock to remain below the sold strike through expiration. So, as long as MOS stays below 100 through October 17, the call-seller keeps the premium received. The total loss for this position varies on your strategy. If the call is not covered (i.e. you don’t own the shares), then your losses are potentially unlimited, as the stock could theoretically rally infinitely. If you own MOS shares, then you keep the premium and receive $100 per share when the stock is called away from you at expiration. The only potential loss is viewed as opportunity cost, where the stock rallies significantly above the sold call strike.
So, assuming you don’t want to have your MOS shares called away from you, does the call-selling position still make sense? Let’s see if the stock’s sentiment or technical backdrops provides any clues.
Getting Technical
As mentioned above, the 90 level is home to key long-term support for MOS. The region buoyed the stock in February and March, marking near-term lows in the shares for both months. Today, the stock’s nearly 9% decline has pushed MOS sharply below this level, potentially indicating that selling pressure is far from abating on the shares. As such, the 90 level could now provide a layer of technical resistance to any rebound in the shares. What’s more, psychological resistance lies overhead at the century mark, and MOS’s 10-week moving average is quickly descending into the region. These technical hurdles should work in favor of a sold MOS October 100 call.
The Sentiment Drivers
The stock’s sentiment backdrop offers little in the way of available sideline money, as the majority of investors are already bullish toward MOS. In addition to the rising preference for calls over puts in the options pits (mentioned above), short interest accounts a paltry 1.6% of the stock’s total float. This lack of negativity from the short-selling community means that there is little chance for a short-covering rally for MOS in the event of a solid earnings report from the company on Wednesday next week.
What’s more, Wall Street analysts are heavily bullish toward MOS. Zacks.com reports that 5 of the 7 analysts following the shares rate them a “buy” or better. While this configuration doesn’t guarantee that MOS will be targeted by downgrades, it does increase the likelihood such ratings could be cut in the event of a poorly received quarterly report. Furthermore, the unstable state of commodities trading could also play a role in analysts’ decisions on the shares. Such a vulnerability should be a warning flag to MOS bulls, but is a potential driver for a sold 100 call as ratings cuts would help keep this option out of the money.
The Verdict?
While there is the potential for a rally in the shares pending the outcome of next week’s earnings report, overhead technical resistance and excessively bullish investors sentiment could halt the shares well before they breach the century mark. Furthermore, MOS options are relatively expensive at the moment, as the stock’s Schaeffer’s Volatility Index (SVI) of 0.87 is the second highest reading taken during the past year. While this factor would be a negative for call buyers, it is a boon for call sellers as higher volatility increases the premiums received by selling the options. What’s more, should you own MOS shares, a covered call on the position could be a nice way to offset some of the stock’s poor price action.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.