We saw very unusual options trading late today during the last hour of trading in shares of Mosaic Co. (NYSE: MOS).  This is the day after reports that Brazil’s Vale S.A. (NYSE: VALE) was interested in the company as one of the possible acquisitions in the potash and agri-business.  We also saw a late-day sudden move of over $2.00 to the downside.

This highly unusual options trading in Mosaic had all the characteristics of last minute options rolls as today is the expiration date for the July 2009 stock options.  Interestingly enough, the same sort of late-day dip was seen in shares of Potash Corp. of Saskatchewan, Inc. (NYSE: POT) and even in Intrepid Potash, Inc. (NYSE: IPI).  Potash Corp. also saw some obvious options roll trading that looked like a mini volume spike, but not in Intrepid.

Unless told differently, we will attribute all of the late-day action to the options roll.  Either way, we wanted to dig down and try to use options as a prediction tool to see just what price is expected to come if Vale does make a play for Mosaic.  This movement was quick enough and violent enough that we would not be surprised if this ends up being one of those classical trading patterns where large options trading triggered a big move and caused the rumor mongers to start barking.

Be advised that some of the options data may be slightly different as these were all taken as a snapshot right before and at the close of the trading day on the NYSE while the CBOE trades were still in the process of closing out.  We saw 30,000+ of the July $50 Calls and 21,000+ of the July $55 Calls trade.  The open interest for each of these was only 18,369 and 10,869 before today.  Here was the volume for the AUGUST Call Options:

AUG-$50 CALL 11,743 contracts versus 11,820 contracts in the prior open interest.
AUG-$55 CALL 32,232 contracts versus 14,058 contracts in the prior open interest.
AUG-$60 CALL 19,120 contracts versus 7,591 contracts in the prior open interest.
AUG-$65 CALL 9,173 contracts versus 2,744 contracts in the prior open interest.
AUG-$70 CALL 9,983 contracts versus 1,684 contracts in the prior open interest.

And for the SEPT-2009 CALLS:
SEPT-$50 1,687 contracts versus 5,541 contracts in the prior open interest.
SEPT-$55 4,570 contracts versus 19,236 contracts in the prior open interest.
SEPT-$60 1,732 contracts versus 8,018 contracts in the prior open interest.
SEPT-$65 9,948 contracts versus 19,055 contracts in the prior open interest.
SEPT-$70 1,000 contracts versus 8,462 contracts in the prior open interest.

Also, you know it, but 10,000 contracts on a fully leveraged basis comes to 1 million shares.  So if we tally up this late-day snapshot for only the AUGUST Calls, then it would equate an extra 8 million shares worth of volume.  We had 27 million shares trade hands Friday with an unofficial closing bell price of $49.56.  An average day has been only about 7.5 million shares per day and yesterday we had 19.97 million shares trade on the day the shares were up on the hopeful buyout news.

We are reluctant to use any exact price prediction based on options because today was options expiration date and the roll will have created many premium disruptions by what we have historically seen.  But if we use the out of the money calls for an estimated price expectation bet for what the options traders were using as a price predictor, we come up with a possible price band.  That would be $54.50 to $57.00 without taking the time value into account.

There is just one small problem here.  Mosaic traded north of $100 last year.  In fact, it traded above $150 at the peak.  Those peak prices are not exactly relevant in the new economy even if you take into account that the stock went into the low $20’s during the peak selling.  This was actually just under $40.00 before the news and rumors came out and the recovery rally came, but Mosaic traded in the mid-$50’s in June and in May.

Based on the crazy trading, it is also hard to fathom a guess as to what Mosaic would settle for in a buyout.  A ‘guestimate’ mixed with intuition is that management would not at all accept that buyout price.  What has happened in the space so far is essentially nothing short of bidding wars and higher prices.  But there is a question of what happens if we double dip in 2010 and fertilizer and potash prices and demand go back down further.

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JON C. OGG
JULY 17, 2009

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