Options Update: The Mosaic Company Attracts Puts Despite Strong Uptrend

The shares of crop nutrient and animal feed producer The Mosaic Company
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have jumped more than 4% so far today, with virtually no news hitting the headlines this morning.

This lack of news hasn’t deterred options traders from speculating on the security, but the direction of this speculation is a bit shocking given the stock’s strong technical performance so far in 2009. Since the beginning of the year, MOS has jumped more than 30%, with the company’s Street-beating earnings report at the beginning of January providing plenty of buying fodder for MOS bulls.

Options traders are apparently seeing things differently in today’s trading, as MOS has been targeted by some heavy put activity. In fact, these normally bearishly oriented options have more than doubled their daily average, placing the security on our Intraday Volume Explosion List. Approximately 5,500 puts have changed hands on the security, with most of this volume trading on the stock’s February 45 strike.

Mosaic put volume details

The Anatomy of a Mosaic Put Position

Digging into the activity, I discovered that practically all of the February 45 put volume changed hands in small blocks in the 100-160 contract range. The lack of any sizeable blocks hints that this activity is coming from individual investors and not institutions. That said, the end result is still the same, with options traders betting on a decline in MOS shares.

For example, a block of 100 February 45 puts changed hands at the ask price of $1.60 at 10:47 a.m. Eastern time. The total outlay for this position would be $16,000 — ($1.60 * 100)*100 = $16,000. For this trade to reach breakeven, MOS would need to plunge about 7.7% to $43.40 per share from the stock’s current trading range near $47 per share before the options expire on Feb. 20. The maximum loss on this position is limited to the initial investment of $16,000.

By entering this trade, the investor is indicating that he expects MOS to decline steadily during the next 2 weeks prior to February expiration. Unfortunately for these MOS bears, the stock has shown no signs of reversing course, with the shares up more than 4% at last check. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

As I mentioned above, MOS has shown stellar price action since the beginning of the year.
The shares are up more than 30% since January, and continue to outperform the SPX on a relative-strength basis. Since bottoming in late November, the equity has trended slowly, but steadily higher along support from its 10-day and 20-day moving averages. MOS has even pulled its 10-week and 20-week trendlines into a bullish cross, and is poised to close its second consecutive week above this formerly repressive duo since June 2008.

What’s more, the security is trading above formerly staunch resistance at the 45 level. This region had held MOS in check since October 2008, and could now provide a springboard for additional gains. The one caveat for this bullish technical backdrop is the potential for round-number resistance at the 50 level.

Daily chart of Mosaic since October 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

Investor opinion toward MOS is mixed at the moment. Aside from today’s heavy put volume, options traders are bullish toward the shares. Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.53 indicates that calls nearly double puts among near-term options. This ratio also ranks below 63% of all those taken during the past year, hinting at optimism from the speculative crowd.

However, short interest jumped by more than 5% during the most recent reporting period, and now accounts for about 4% of the stock’s total float. Furthermore, 4 of the 7 analysts following MOS rate the shares a “hold.” Should the stock’s strong technical uptrend sway some of these bears, we could see an influx of buying pressure exacerbate MOS’s rally.

Sentiment indicators for Mosaic

The Verdict?

Given that there is plenty of sideline money available that could extend MOS’s rally, I am not exactly thrilled with the idea of a February 45 put. Meanwhile, with the potential for overhead resistance at the round-number 50 level, a call doesn’t look prudent either. Traders may want to hold off on a long MOS position until the shares can breach this potentially troublesome technical hurdle. However, this combination of solid price action and potential support from unwinding bullish sentiment could make for a nice put-sell position. If you are looking to capture a bit of premium on the shares, selling a March 30 put seems like a viable opportunity at the moment.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.