Alcoa Options Busy

By option_review

August 3, 2009

599

Today’s tickers: AA, KEY, EWZ, F, CBS, TCK & OSK

AA – The aluminum producer has experienced a more than 7.5% rally in shares today to $12.66. Commodity stocks rose on reports indicating manufacturing has declined less than previously forecast, in addition to an unexpected increase in spending on construction. Options activity on Alcoa suggests near-term bullish sentiment and medium-term bearishness. Bullish traders targeted the August 13 strike price to buy more than 5,700 calls for 36 cents apiece. Meanwhile, one investor rolled 2,000 call options up from the August 12 strike price by selling the lots for 83 cents, which he then spread against the purchase of 2,000 calls at the higher August 14 strike for 14 cents a-pop. A much gloomier tale was inferred from the actions of bearish individuals in the October contract. The now in-the-money October 12.5 strike has approximately 12,900 calls shed for 1.15 apiece. We note that the call sales could represent the work of investors banking gains due to the existing open interest at the strike of 71,000. However, a similar picture was seen at the October 15 strike where approximately 25,000 calls were sold for 48 cents per contract. The October 15 strike previously had open interest of just 6,900 contracts compared to the more than 30,900 lots which exchanged hands there today. Perhaps call sellers do not see shares of Alcoa rising through $15.00 by expiration. Otherwise, investors could be long shares of the underlying and establishing pseudo-covered calls by shedding the contracts at the higher strike. Finally, the January 2011 5.0 strike price had 18,500 puts trade for 40 cents apiece. We believe it is likely that the investor is closing out a short put position originally established back on May 8, 2009. It appears that the trader sold 18,000 puts for 83 cents and today bought the lots back for 40 cents apiece. If this is indeed the direction of the trade, the investor has banked profits of 43 cents per contract, or a total of $774,000. – Alcoa, Inc.

KEY – Shares of the banking services firm have rallied nearly 11.5% higher during today’s trading session to stand at the current price of $6.44. One long-term options bull was observed initiating a call spread in the January 2010 contract. It appears that the investor purchased 4,000 now in-the-money calls at the January 6.0 strike price for an average premium of 1.19 apiece, which he spread against the sale of 4,000 calls at the higher January 9.0 strike for 25 cents each. The net cost of the call spread amounts to 94 cents and yields maximum potential profits of 2.06 if shares can climb up to $9.00 by expiration. The stock must rally 7% higher in order for the investor to begin to amass profits at the breakeven point of $6.94. To attain the maximum profits available, shares of KEY must rally approximately 40% to $9.00 by expiration. – KeyCorp

EWZ – The Brazil exchange-traded-fund has risen more than 4.5% to $60.39. Option traders displayed diverse tactics on the EWZ today. Some investors locked in gains by purchasing near-term put options in the August contract. About 2,200 puts were picked up at the August 58 strike for 1.40 each, while the higher August 60 strike had 1,000 puts bought for 2.15 apiece. Covered call sellers targeted the August 62 strike price where approximately 10,500 calls were shed for an average premium of 1.48 per contract. Investors purchased the stock for an effective price per share of $58.91 by simultaneously writing the call options. If the August 62 strike calls land in-the-money by expiration investors will have shares of the underlying called from them at $62.00 each. The exit strategy, if employed by expiration, will leave traders with gains of 5% on the rise in the stock. Plain-vanilla bullish call buying occurred at the higher August 63 strike price where about 1,000 calls were scooped up for 93 cents each. Finally, a bearish trader lumbered into the September contract to enact a put spread. It looks as though this individual purchased 5,000 puts at the September 60 strike for 3.47 apiece, and then sold 5,000 puts at the lower September 55 strike for 1.66 per contract. The net cost of the put spread amounts to 1.81. The investor will realize maximum profits of 3.19 if shares decline to $55.00 by expiration next month. – iShares MSCI Brazil Index

F– Shares of Ford are higher by an outrageous 7% at $8.56 as analysts pore over the start of data revealing the success of the government’s “cash for clunkers” scheme. No one is waiting around to see if the industry returns to a 10 million annualized pace after Ford let it slip that it had its first month over month sales increase since 2007. Bullish option positioning was evident at the August 8, 9 and 10 strikes in anticipation of a full-blown recovery for the company, the consumer and the economy. The 16,000 calls trading at the 9 strike expiring in three weeks is three-times greater than the established number of investor positions. The 10 strike also had less than 1,000 open positions before today. In the September contract, the 9 strike saw premiums change hands for 60 cents some 10,000 times implying a share price gain of 23% after driving season comes to an end. In a sign of increasing uncertainty – although in a positive light for a change – option implied volatility jumped 15% to 68% from Friday’s level. – Ford Motor Co.

CBS – Bullish options activity by one investor launched the American broadcasting network onto our ‘most active by options volume’ market scanner amid a rally in shares today of more than 6% to $8.70. CBS is set to report second-quarter earnings this coming Thursday, August 6, 2009. The bullish investor was rewarded today for having established long call positions in the August and September contracts back on July 6, 2009. It appears that the trader originally purchased 4,000 calls for 25 cents apiece at the August 7.5 strike, and another lot of 4,000 calls at the September 7.5 strike for 40 cents each. Today he banked gains by selling the August 7.5 strike calls for 1.25 per contract and the September 7.5 strike calls for 1.45 apiece. Finally, he reestablished a more bullish stance by purchasing 10,000 calls at the September 10 strike price for a premium of 35 cents each. The investor ultimately banked gains of about 2.05 per call option sold, or a total of $820,000. He will begin to realize additional gains on the new long call position if shares rally higher by 19% and surpass the breakeven point at $10.35 by expiration day. – CBS Corp.

TCK – Shares of the Canada-based firm engaged in the exploration, development, and production of natural resources, have surged more than 7.5% today to $28.31. Bullish option plays were observed on the stock in the near-term August contract. One investor appears to have rolled an established long-call position to a higher strike price in the hope that TCK continues to climb by expiration. The trader sold 1,500 calls at the deep in-the-money August 22.5 strike price for a hefty premium of 5.15 apiece. Spread against the sale, was the purchase of 3,000 calls at the higher August 29 strike for an average premium of 1.13 per contract. The investor was able to double the size of his call position, roll it to a higher strike, and take in profits by closing out the in-the-money calls. Profits enjoyed on the spread amount to 2.89. Additional profits will begin to amass for the bullish trader if shares can breach the breakeven point at $29.00 by expiration in just a few weeks. – Teck Resources Limited

OSK – The manufacturer of specialty commercial trucks jumped onto our ‘most active by options volume’ market scanner this morning as investors initiated bullish option trades on the stock. Shares of OSK surged more than 10.5% to $30.42 after the firm won two U.S. military orders, valued at an estimated $2.13 billion, to manufacture all-terrain trucks utilized to protect troops in Afghanistan from roadside bombs. Traders positioning for a continued rally in the stock targeted the near-term August 35 strike price to purchase more than 4,400 calls for an average premium of 50 cents apiece. Investors long the calls will begin to realize profits if shares increase another 17% to surpass the breakeven point at $35.50 by expiration. Option implied volatility on OSK has risen throughout today’s trading session from a starting value of 59% to the current reading of 65%. – Oshkosh Corp.

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