Today's heavy options volume in rare-earth magnet company REalloys Inc. (ALOY) suggests that investors may be bullish on ALOY stock ahead of its earnings next week. Investors have been buying and selling out-of-the-money (OTM) puts at $10.00 today for expiry in 37 days (Sept. 18).
ALOY is at $12.85 today, up slightly, and well up from a recent trough price of $7.03 on July 24. However, it's still well below a recent peak of $19.70 on June 22.
Investors are pushing ALOY stock higher ahead of earnings set to be released on August 19.
Analysts are expecting a lower earnings per share (EPS) loss of just 5 cents per share, compared to 35 cents last year and -$1.95 last quarter, according to data from Stock Analysis.
Investors are keen to find a rare-earth stock that can help the U.S. get ahead of China's stranglehold on rare-earth magnets. The U.S. has set a Jan. 1, 2027, deadline for federal contracts that won't allow China-origin rare-earth materials into U.S. weapons designs, as Marketbeat recently explained.
However, many of these companies, including ALOY, are running at a loss. That means they have had to raise additional capital. For example, REalloys recently raised $100 million in a private equity capital raise on June 26. The price was $14.25 per share.
That could be one reason why investors have been buying these out-of-the-money (OTM) puts today.
Unusual Put Options Volume in ALOY Stock
This unusual volume can be seen in Barchart's Unusual Stock Options Activity Report today. It shows that over 7,500 put contracts have traded at $10.00 for expiry on Sept. 18.
That is over 30 times the prior number of put options outstanding at that price and expiry period. This might imply that buyers of these puts expect that there could be another equity capital raise. That might be dilutive to existing shareholders.
It will also become apparent after the Aug. 19 earnings release, which is well before the expiry period of these puts.
However, note that the put premium is 65 cents. That provides short-sellers of these puts an attractive yield. For example, after posting $1,000 for every put contract “sold to open,” the investor receives $65.00.
As a result, the one-month yield (i.e., 37 days to expiry) is 6.5% (i.e., $65/$1,000) for these investors. Moreover, the breakeven point is $10.00 - $0.65, or $9.35. That's over 27% lower than today's price.
In other words, it provides plenty of downside protection to these short-sellers.
Cash Flow Issues
So, what is the possibility of another capital raise? Last quarter, the company had an outflow of over $10.5 million in operating cash flow.
Moreover, its capex program could be ramped substantially after it signed several deals recently designed to build up its magnet manufacturing and commercialization.
However, the $100 million in capital, along with its existing $42 million in cash at the end of Q1, should afford the company a good deal of breathing room.
That is why investors will scrutinize its cash flow and capex projections in the upcoming Q2 earnings release.
Nevertheless, it seems that a $10.00 strike price is a good point to begin shorting puts, with a $9.35 buy-in breakeven. This is especially the case since the puts expire in a short period (i.e., in 37 days).
In effect, it's a bullish play on ALOY stock. It can provide investors with an attractive 6.50% one-month+ short-put yield play.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
/Sign%20of%20Intel%20at%20entrance%20%20by%20michaelmond.jpeg)
/NVIDIA%20Corp%20logo%20outside%20building-by%20BING-JHEN_HONG%20via%20iStock.jpg)
