In a little more than a year shares of Alcoa rallied 130% from the 52 week lows ($7.70), to its recent 3 year high of ($17.75):
The uptrend was a work of art. That was until the hiccup in October when the stock broke the steep uptrend and dropped 21% before recovering to make a new high. From purely a technical standpoint, that new high is a bit of problem. Why you ask? Simply because it failed to break above the uptrend and has since declined 16% (despite still being up 42% on the year.)
On a near term basis the stock is at a fairly precarious spot on the chart, having touched the 200 day moving average (yellow below), and as of now holding, similar to how it bottomed in October following that drop:
As one might expect the recent market volatility has driven option prices higher in AA, with 30 day at the money implied vol (blue below) once again nearing the October highs, despite the stock about 10% higher than the mid Oct lots. Whats evident from the chart below of IV plotted against 30 day at the money realized (how much the stock is moving – white below), is that options prices have risen much quicker than the stock movement, suggesting investors are reaching for protection:[caption id="attachment_49015" align="aligncenter" width="600"] AA 30 day at the money IV (blue) vs realized vol (white) from Bloomberg[/caption]
The way we’d probably play this from the short side is wait to see of there’s a Fed meeting bounce this week back towards the 50 day moving average around $16 in the stock. At that point vol would likely come in a few ticks and it’d be less of a press to perhaps buy the Feb 16 puts. With the stock at 16 they’d likely be about 1.15ish, which seems like a good own if it really is in the midst of a topping out process.