Alcoa Options (AA): Unusual Trading Activity

| July 9, 2012 | 0 Comments

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

But most importantly, it’s the first Dow component every quarter to report earnings.  And that can set the tone for other earnings surprises or disappointments.

Now guess what?  AA kicks off second quarter earnings season today.  After the close, the company will report their most recent quarterly numbers.

While funds are walking on egg shells, option traders are scurrying to position themselves for what is bound to be a very important earnings season.

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.

More than a few such traders are trying to take advantage of the situation.

Just before the close on Friday, our radar picked up a few block trades totaling 9,000 contracts of the AA July (Weekly) $9 call options.  They traded at an average price of a mere $0.15 a piece.

Now remember, weekly options expire at the close on Friday each week.

So, with the stock closing this past Friday at $8.73 a share, this trade is clearly a bullish play on AA.  Traders are making a calculated bet that a good earnings report should send AA’s stock price above $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 primary factor affecting demand for aluminum products is economic growth.   Another important factor is the demand for durable goods.

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

And now investors are very curious if this quarter’s demand for aluminum will begin to rise again, indicating global growth.

Now, are these traders out of their minds by hoping for rally in Alcoa?

The short answer… I don’t think so.

Here’s why…

After completing their refinery expansion and new bauxite mine in Brazil, the company’s alumina operations are the most cost-competitive and hit record production in 2010.  And expectations are for this to continue for the next few years.

Obviously, as the global economy recovers, the price of aluminum will be back on the rise.  The result, Alcoa’s profitability will increase considerably.

Lastly, Alcoa has a joint venture in the works with Saudi Arabia that’s expected to be very low on the global cost curve when it becomes operational costs all the way out to 2014.  This is thanks to a bountiful supply of low-cost natural gas and a fully developed infrastructure.

This project will certainly increase demand for Alcoa’s raw materials segment.

Bottom line… AA has a lot going for them.  And I believe this call 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.