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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.

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