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Alcoa Option Bears Active Ahead of Earnings


AA put buyers expect the stock to hit new lows after earnings.

Blue-chip aluminum concern Alcoa Inc (NYSE:AA) will unofficially kick off earnings season on Monday, and option traders appear less than optimistic. Investors are initiating bearish bets at a faster-than-usual clip on the major options exchanges, and yesterday was no exception. During the course of the session, Alcoa saw roughly 18,000 put options change hands -- almost three times the norm.

Most active was the at-the-money May 8 put, which saw more than 9,000 contracts cross at a volume-weighted average price (VWAP) of $0.21. The majority of the puts traded on the ask side, and open interest soared by almost 5,000 contracts overnight, pointing to buy-to-open action.

In order to profit on the play, the buyers need Alcoa to drop beneath the $7.79 level (strike price minus VWAP) by mid-May, when the options expire. For reference, the shares are currently perched around $8.22, meaning the equity would need to sink roughly 5.2% to hit breakeven. While the required drop doesn't seem too heavy in percentage terms, it's worth noting that Alcoa hasn't finished a week south of $8 in four years.

Should the stock maintain its long-term foothold, the most the buyers are risking is the initial premium paid for the puts. That doesn't mean the contracts were cheap, though. The security's Schaeffer's Volatility Scorecard (SVS) of 17 indicates that AA's options are actually rather pricey right now, relative to the probability of an outsized move on the charts.

As alluded to earlier, yesterday's affinity for puts merely echoes the growing trend. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.36 ranks in the 60th percentile of its annual range. In other words, option buyers have picked up AA puts over calls at an accelerated clip during the past couple of weeks.

As a result, the stock's Schaeffer's put/call open interest ratio (SOIR) has ascended to 1.00 -- above 88% of all other readings of the past year. In simpler terms, AA's short-term options players have rarely been more put-heavy during the past year.

Looking ahead to Alcoa's earnings release -- slated for after the closing bell on Monday, April 8 -- analysts are anticipating a quarterly profit of 8 cents per share for the firm, which often sets the tone for earnings season. Historically, AA has matched or exceeded the Street's bottom-line estimates in each of the past four quarters. Post-earnings price action, however, has been mixed; following six of the eight last earnings announcements, AA closed lower the subsequent session.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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