Update – Alcoa (AA) Couldn’t Wait ‘Til Tomorrow

by CC August 25, 2017 3:23 pm • Trade Updates

One of the strategies we like to employ during low volatility, low volume holiday/ vacation periods is calendars. The idea here is that the weeks of the year into the end of Summer, around Thanksgiving, Christmas and New Years tend to see low volume, low vol, and there’s a pent up bout of volatility that springs to the surface after everyone is back in the office. That doesn’t necessarily mean downward market moves, sometimes its moves higher.

Just 4 days ago we took a look at Alcoa (AA) from the long side and an obvious position to us was to sell some near term premium to finance later into the fall, in this case a call calendar, for a move higher. There was also obvious technical resistance to lean on as a move above 40 would be a breakout for the stock. Here was the trade, from Aug 21st:

AA ($38.40) Buy Sept / Oct 40 call calendar for $1
  • Selling to open 1 Sept 40 call at 65 cents
  • Buying to open 1 Oct 40 call for 1.65

Almost immediately after this post AA did indeed breakout above that resistance. In hindsight the calendar wasn’t the correct position in this case. But, it still could work out if managed correctly. With the stock now 41.25 this trade is worth about 1.20 versus the initial cost of 1.00. Better than a sharp stick in the eye but it really didn’t take advantage of this quick move higher. The issue now is that the trade is short deltas, with a move back to 40 the best case scenario into Sept expiration. However, the short Sept calls still have about .70 in extrinsic premium on them and that helps to not have to panic yet. That premium will come in in the form of more profits should the stock be here or slightly lower over the next week or so.

From a trade management standpoint the best bet is to probably give this a few days into the long Labor Day weekend, try to capture some of that premium in Sept, and keep a tight leash on the trade in case the stock moves higher. If it moves lower or stays here it’s in good shape for a roll out to October, at more favorable terms for the roll.


 

Speaking of the upcoming Holiday, both Dan and I will be traveling next week so posts may be a little light. Feel free to hit us on email if you have any questions and we’ll check in from time to time and probably have a few posts, just not a couple a day like normal.