Event: AA reports its Q3 earnings today after the close. The options market is implying about a 5% one day move, which is slightly above the 4 qtr avg of about 4.25%, and well above the 8 qtr avg of about 2.75%.
Sentiment: Wall Street analysts are neutral on the stock, with 11 buys, 10 holds, and 1 sell, and an average 12 month price target of around $17. AA is already up 50% year-to-date, one of the best performing stocks in the S&P 500 index. Short interest is near 3 year lows at around 5% of the float.
Options Open Interest: Total open interest is skewed towards calls over puts by a ratio of 1.4 to 1. AA’s impressive rise in 2014 has attracted more call buying, and the call / put volume ratio over the last month is actually even higher than the total open interest, at 3 to 1.
The bulk of the open interest is in Jan15 expiration. Shorter-term, the Oct18th 16 and 17 calls both have over 20k of open interest. In Jan15 expiry, the 15 calls and the 12 puts both have over 70k of open interest. The Jan15 10 call line has over 100k of open interest.
Price Action / Technicals: AA traded above its 50 day moving average from Oct 2013 until its recent break of the 50 day ma last month. That steady uptrend led to the stock doubling in less than a year. The stock is experiencing its first real consolidation of the past year:
The stock’s high of the year is $17.36, while the rising 200 day moving average is now around $13.83.
While the rally has been impressive, AA was actually unable to reach a new 5 year high, stalling just below the 2011 high of $18.47:
The $14 to $18 range will be the important area to watch over the next few months.
Volatility: 30 day implied volatility in Alcoa has reached the high end of its 2 year range ahead of today’s report:
The implied move of 5% in AA is well above the 8 quarter average of 2.75%, and reflects traders’ general jitteriness around commodity-related names given the moves in the underlying commodity market in the past couple of months.
Our View: AA has been a stellar performer in 2014, but the onset of weakness in commodity markets has caused the stock to stall in the past couple of months. Given the sentiment shift towards the sector, we’d be surprised to see a breakout to a new high for the year. On the downside, the $14 level, near the rising 200 day moving average will be key support. Implied volatility is elevated, so options strategies should take into account the substantial vol crush after the event.