Schaeffer's Trading Floor Blog

Earnings Preview: Alcoa Inc (AA)

Second-quarter earnings season kicks off this evening when Alcoa Inc reports

by 7/8/2014 11:03 AM
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Second-quarter earnings season unofficially gets underway this evening when Alcoa Inc (NYSE:AA) takes its spot in the limelight. Although the aluminum giant jumped nearly 4% in the session immediately following its last quarterly showing -- and has hit a number of higher highs lately -- activity in the stock's options pits has been relatively tame.

In fact, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 2.50 ranks in the middling 45th percentile of its annual range.

Drilling down on the front-month series -- which expires at next Friday's close -- call players have targeted AA's in-the-money (ITM) July 11 strike, which houses peak call open interest of 34,024 contracts. On the put side, meanwhile, peak open interest can be found at the ITM July 15 strike, where 17,054 contracts currently reside.

Those purchasing AA's front-month options have encountered rising premiums in recent weeks, which is typical leading up to scheduled events. Specifically, the stock's Schaeffer's Volatility Index (SVI) has edged up to 35% from 26% since June 25. Plus, the current ratio ranks in the 60th percentile of its annual range, meaning premium is more pricey than usual, from a volatility standpoint.

Outside of the options pits, sentiment has tended more toward the bearish side. For starters, short interest accounts for a healthy 6% of the stock's available float, and would take more than six sessions to cover, at AA's average daily pace of trading.

Additionally, 60% of covering analysts maintain a "hold" or "strong sell" suggestion toward the stock, while the consensus 12-month price target of $13.68 stands at a discount to Alcoa's current perch at $14.72. Should AA turn in another bottom-line beat (the company has matched or exceeded analysts' profit estimates in seven of the past eight quarters), an unwinding of this skepticism could help propel the shares higher.

For Alcoa Inc's (NYSE:AA) second quarter, Wall Street has forecast a profit of 12 cents per share. This sits a nickel north of what the company earned in the year-ago period.


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