Skip to main content

Morning Update

This morning protests rocked the streets of Athens again as a result of Angela Merkel’s visit to Greece. This, along with growth forcast downgrades by the IMF yesterday, has overnight sentiment negative. The Euro is lower heading into the North American crossover, which has S&P 500 futures modestly higher before the open. Today, much like yesterday, is devoid of any major economic news so many trader’s focus will be on Alcoa’s earnings after the bell.

Analysts are looking for earnings of $0.01 on revenue of $5.57B, and at least one options trader believes Alcoa will beat these expectations. Yesterday with Alcoa stock trading at 9.12 we saw one trader buy 10,078 Nov. 10 calls for $0.12 and sell 5,978 April 8 puts for $0.41. This is a bullish trade that gains long exposure to the stock by buying near-term call options and financing it by selling long dated out of the money puts. This trader avoided buying Oct. calls because they are trading with a high implied volatility premium to Nov. options due to earnings. This trade will make money if Alcoa is above 9.91 at Nov. expiration, which is 8.7% above yesterday’s close. Historically Alcoa has moved 3.2% after reporting earnings and currently the options market is pricing in a move of 4.9%. 

One reason this trader may be bullish on Alcoa is because everyone else has become so bearish. Since reporting mixed results in Q2 Alcoa has been downgraded by three analysts, aluminum prices have fallen, and the company announced it will take an $85M after tax charge as a result of the EPA’s Proposed Remedial Action Plan for the Grasse River. However CEO Klaus Kleinfeld has continued to say that the fundamentals of the aluminum market are strong and expects global demand to increase 7% this year. With sentiment generally pessimistic on Alcoa the stock could have quite a bit of room to run should earnings beat, which is exactly what this options trade is looking to profit from.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Heading into Summer

With the dog days of summer almost upon us, it's time to start thinking about option strategies. Most of the time, the summer is when markets are calm. However, this may not necessarily be the case for options. Playing both sides, options give you an edge as you decide where you think the market may be. On Options Action, the panel had many interesting topics on their plates. As volatility continues the shrink, the fear in the market is slowly deteriorating. However, this may not mean a jump is coming. There is still a lot of uncertainty out there. Putting this all in prospective click below to hear all the newest option strategies. http://www.cnbc.com/id/15840232?video=1131628744&play=1 http://www.cnbc.com/id/15840232?video=1131630253&play=1 http://www.cnbc.com/id/15840232?video=1131628723&play=1 http://www.cnbc.com/id/15840232?video=1131628711&play=1
1 comment
Read more