I have several regrets for 2010. In my trading account, one has to be not scooping up Alcoa (NYSE: AA) for $10 when the stock bottomed out on August 25. By the end of the year Alcoa was up over 50%. Even that would have been a decent buy, as the stock has gained almost a full 10% since the beginning of trading on Monday this week. For a firm that is supposedly a blue chip or a “20th Century” company, the aluminum producer is certainly moving more like a biotech or a tech house. I was half expecting Alcoa to announce something at the CES show that started this week.
I have missed the first group that is boarding this ship of tin foil. The good news is that this stock may move up even more over the next few months or even days. The company’s earnings announcement is traditionally considered the beginning of earnings season and Alcoa will announce its fourth quarter results on Monday, Jan. 10. While I am not a soothsayer, it appears the public is betting on this company to beat its already raised expectations. This is apparent in the movement of the stock, and even more apparent in Alcoa’s option activity.
On Wednesday Alcoa traded almost two times its average daily option volume and open interest is also elevated. The increase in activity is almost exclusively upside call buying. I have noticed that call buying, primarily in out-of-the-money strikes, is typically on the offer. There is heavy call buying in the Jan and Feb 16s, the Feb 17s, the Jan 17.5s and the Feb 18 calls.
The buying activity has rallied implied volatility (IV) a few points, and is likely to rally volatility a touch higher over the next few days. In the big picture though, IV is not that high leading into earnings. This makes me think that a call, or a straddle buy could make some sense. One might even be able to lay off the straddle ahead of earnings. I think a straight upside call buy could have some profit potential and is “dollar cheap.” By that I mean that, no matter the IV, the cost of the option is low enough as to not be prohibitive of buying the contract. The AA Feb 17 Calls seem like a real bargain for .60 cents. If the stock is up in the next three days as much as it has been over the last three, the Feb 17s could return more than 100%.
Follow Mark Sebastian on Twitter @optionpit.
