Last night on CNBC’s Fast Money I highlighted unusually high call volume in Alcoa (AA) a day before the company was to report their Q2 results (watch here).
Well, the report is tonight, and the options market is implying about a 5.5% move in either direction, which is rich to the 4 qtr average of about 4%.
The stock is making new 52 week lows today, down 32% on the year, apparently being pulled to long term support at $10:
Yesterday the most active strike on the day was the Sept 11 calls, with 15,000 trading at an average price of 53 cents. Today the two most active strike are 3400 of the July 11 calls and 3400 of the July 10.50 puts with put volume a tad below call volume. Yesterday the action was clearly more skewed to opening call buying.
Short dated options prices have shot up as expected, with 30 day at them money implied vol (blue line below) trading at one of the widest gaps to realized vol (how much the stock is moving, white line below) in a very long time:[caption id="attachment_55156" align="aligncenter" width="600"] from Bloomberg[/caption]
Long premium directional trades that do not realize the implied move will be a hard way to make money given the set up.
In order to be successful in playing for a bounce in AA shares, one of the more important inputs is time. Considering AA’s current weakness, and exposure to strong dollar and emerging markets demand, I suspect the stock at current levels incorporates most of the negative sentiment. But the same argument could have been made for Micron into its Q2 print two weeks ago. We are in a market now where investors are shooting first and asking questions later. Which is a decent enough reason to overlook high options premiums for those looking to define risk on a directional basis into potentially volatile events. I would also be a bit wary of selling puts in stocks such as AA where prices are expensive but premiums appear dollar cheap.
If I were inclined to play AA for a bounce I would likely look at some September near the money calls (like the activity highlighted above) in the Sept 11 calls for less than 5% over the next two months.
On the flip side, for those that think the stock could have an out-sized move to the downside on a miss and guide down, with the stock at $10.60, the July 10th weekly 10.50 puts offered at .30 look like a cheap enough punt. I don’t have a directional view and will not be trading the stock or the options.