Rare Earths Show Strength & Weakness (MCP)
Headline risk is a B*&H is it not? I think i have warned in the past about this sector of stocks and the power behind their momentum on both ends of the stick.
UP or down these darlings of the momentum trading world can move like blind bats without sonar at the drop of a hat, which is why i enjoy trading options on these names because you can define your risk and spread off risk if the trade becomes sour.
Your hedge today would have paid more then you original position considering you would have bought a low vol put option before the real puke
happened in MCP and REE. I personally would have sold calls as we broke support as traders would have scrambled to hit bids destroying vol in the process, all while long OTM puts. I picked up the 48 puts with MCP trading around 49 hoping for a flush after news of a Molycorp Mine in Cali will not be open for months.
The original catalyst for the UP move today was early this morning as China announced they were lowering the rare earth export quota by 11.4% for 2011. The headline risk was the California mine causing momentum traders to jump ship as bigger traders said no soup for you and exited the trade while they had some shekels still on the table.
REE on the other hand still managed to close up 10% as they were not as much a victim of headline risk as MCP, though in sympathy she sold off hard as Humpty Dumpty fell….