One week after a late "Merger Monday", umm Tuesday session, found a few bulls attempting to strike it rich in the fishy "takeover chowder" waters of Energy Conversion (ENER)-smoking rumors were upon Wall & Main again.
In Tuesday's story shares of Potash (POT) were getting more than a few bulls to feel relaxed and "oh, so good" about their stakes in the company. Some early and unsubstantiated chatter had Aussie mining giant BHP (BHP) mulling an interest in the Aggie (MOO) concern. Despite the track record of such likeable banter, the rumor struck a chord with bulls as POT finished up nearly 6% on the session.
As they say, timing is everything and maybe a little technical refusal to budge. Monday saw shares under pressure following a downgrade to "Hold" from "Buy" by analysts at Citigroup. The drop cited factors such as weaker potash applications, Chinese contract delays and debt-laden producers, as well as falling incomes of farmers as points of concern.
According to the value-minded folks at Motley Fool, the move by Citigroup makes sense. However, those same investors have a habit of failing to do that other brand of homework associated with the price chart. Technically and for both Monday's and Tuesday's bulls, shares of POT look to have confirmed a weekly double bottom base of three months which held the 200-Day MA.
For their part, option traders appeared to be more concerned with making sense and "cents" of rumors and technical floors than worrying if Potash was less attractive as a more noble-minded value holding. On the session call activity trumped put trading by a two-to-one margin on more than twice its average daily contract count with volume totaling 87,000.
Some and possibly a good deal of the action may have been tied to closing interests as Friday marks expiration for the September contract. With that in mind, not too shockingly the ATM September 95 call / 90 put strangle priced at $1.55 saw the most volume by virtue of traders collective actions. The most heavily traded contract was the slightly out-of-money call with volume just north of 11,000.
Figure 1: Potash (POT) Implied Historical View
Implieds picked up ever-so-slightly in the October contract but remain interestingly in their own "value" area based on historical implieds and the underlying statistical volatility of POT shares. Shown above is the two year IV picture which finds premiums well into the lower right hand quadrant of the value landscape. While value can always find lower ground, much to the chagrin of those entering, relative to POT's daily dumps and jumps which suggests theoretical fair value, the bet becomes more compelling.
Most active in that month, the October 95 call saw about 8,300 contracts trade versus open interest of 2,400. In lieu of POT looking to confirm a technical low and so little time remaining in September, it's likely another spread favorite was the October 95 / September 95 roll.
Trader's still holding the near worthless September 95 call as of Monday's close had what I'd call a very nice break with Tuesday's jump in share and contract price. By "selling to close" the September 95 call for $1.10 and "buying to open" the October 95 call for $4.25, a "stay" of 31 more days of hopefully green shoots "mooovement" has been granted.
Personally, while I'd enjoy seeing the technical low hold, I think in appreciation of the value option discussed above, "selling a little something" in the form of short stock with perhaps a slight bullish lean, makes better sense.
Chris Tyler
Senior Staff Writer & Options Strategist
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The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
