Puts are trading at 11 times their normal rate today in Alcoa Inc's
(NYSE:AA) options pits, with about 30,000 puts total having changed hands so far. More than one-third of that action has taken place at the October 7 strike, where over 10,000 contracts have crossed the tape in a series of mid-to-large-sized blocks.
All of the AA options traded at the ask price, suggesting they were bought. With implied volatility up 3 percentage points, and open interest of roughly 6,200 contracts at the strike, it's safe to say the bearish bets were freshly initiated at volume-weighted average price (VWAP) of $0.06.
Therefore, in order for the traders to profit, Alcoa shares must dip to $6.94 (strike price less the VWAP) -- a significant move, considering the stock is currently trading at $8.06 -- by October options expiration. If the slide doesn't materialize, however, the most the speculators have at stake is the modest initial premium paid.
Another large block of puts at the January 2014 7 strike recently crossed the tape, trading at the ask price of $0.20 per contract. This particular speculator is allowing a little more time for AA to make a downward move, as the stock has more than five months to breach breakeven of $6.80 (strike price less the premium paid).
The attention being paid to puts over calls is nothing new for AA. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock shows a 10-day put/call volume ratio of 0.76. That ratio is just 8 percentage points shy of an annual acme, which suggests traders have been scooping up puts relative to calls at an accelerated clip over the past two weeks.
Elsewhere, Wall Street is bearish on the Dow
(INDEXDJX:.DJI) component. Just five out of 14 covering analysts
rate AA a "buy" or better, compared to six "holds" and three "strong sell" recommendations. Additionally, short interest
now makes up more than 10% of the aluminum producer's outstanding float, which represents nine days' worth of buying demand, at typical daily trading volumes.
That the winds of pessimism are swirling around Alcoa is no surprise. Technically, the equity has had a less-than-spectacular run, down close to 7% year-to-date. What's more, the stock is running into a potential layer of resistance at its 20-week moving average, which rejected a short-lived rally in May and capped upside in the shares last week.
This article by Alex Eppstein was originally published on Schaeffer's Investment Research.
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