Alcoa Options (AA): Unusual Trading Activity

| August 16, 2012 | 0 Comments

AA OptionsOptions in aluminum manufacturing giant Alcoa (AA) started to light up our tracking system late yesterday afternoon.

Most investors don’t know how important Alcoa is to market confidence.

For one, its sales are seen as a sign of global growth or slowing, as most building projects use aluminum in some way, shape, or form.

In fact, options activity in AA over the last week has been about five times more than average.

And with volatility on a sharp decline lately, option traders are in a buying mood.  You see, the lower the volatility, the less expensive options cost to purchase.  As a result, large option traders can pick up big blocks at cheap prices.

Now, more than a few such traders are trying to take advantage of the situation.

Just before the close yesterday, our radar detected a block trade totaling 6,000 contracts of the AA September $9 strike put options.  They traded at an average price of a mere $0.43 a piece.

Now remember, put buying has unlimited profit potential below the strike price minus the premium paid.  In this case, $8.57 a share.

So, with the stock closing yesterday at $8.82 a share, this trade is clearly a bearish play on AA.  Traders are making a calculated bet that any pullback will send AA’s stock price below $9 in a hurry. 

But, why focus on this name right now?

If you don’t already know, Alcoa is the world’s largest producer of primary aluminum.  It is also one of the world’s largest suppliers of alumina, an intermediate raw material used to make aluminum.

The company has operations on every continent including lower-cost regions such as South America and the Middle East.

The three largest end markets for aluminum worldwide are transportation, containers/packaging, and construction.  

Now, are these traders out of their minds for expecting a decline in Alcoa?

The short answer… I don’t think so.

Here’s why…

First off, aluminum demand is highly dependent on the strength of the global economy. When consumption levels decline during a global recession, the strength and speed of the impending recovery is always uncertain.

In addition, excess capacity from smelter restarts and new entrants may hurt aluminum prices.  Obviously this can have large repercussions on AA’s future revenues.

Lastly, surging demand for low-cost alumina capacity and few bauxite (used in aluminum)-rich regions limit opportunities for expansion.   And competition for these assets could further reduce the availability of expansion prospects or erode Alcoa’s short term returns.

Bottom line… AA has some short term issues.  And I believe this put position is a very smart play.

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.