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Option Idea of the Week: Alcoa Inc (AA)

AA shares have been rallying to new highs along solid trendline support

by 6/6/2014 11:53:16 AM
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Alcoa Inc (NYSE:AA) produces aluminum, unofficially kicks off earnings season each quarter, and -- until recently -- was a member of the Dow Jones Industrial Average. It's also been marching quietly higher in impressive fashion this year. Year-over-year, AA shares have gained more than 70%, and today reached their highest point since August 2011, at $14.27.

Helping in the stock's quest for new highs has been the equity's 40-day moving average. AA shares have been trendline atop their 40-day since last October, and have bounced from support here numerous times, including as recently as last week. Schaeffer's Senior Quantitative Analyst Rocky White has quantified the results of these pullbacks to support, and found that AA has returned an average of 3.8% in the three weeks after such a signal, and has been positive 63% of the time.

Daily chart of Alcoa Inc (AA) since September 2013 with 40-day moving average

Not everyone is impressed with this price action, however, starting with Wall Street. Fifteen brokerage firms follow the stock, 10 of whom rank it a "hold" or worse. Additionally, the consensus 12-month price target of $12.82 is below Alcoa's current price of $14.17. As the shares continue to march up the charts, upgrades -- such as the one BofA-Merrill Lynch handed down earlier this week -- and/or price-target hikes could be in the cards.

Meanwhile, in the options pits, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio has zoomed higher in recent months. Specifically, the reading has surged from 0.39 on March 6 to 0.74 today, indicating demand for long puts (relative to calls) is growing. What's more, this ratio stands just 2 percentage points shy of an annual peak.

Alcoa could also benefit from a short-covering rally, if short sellers begin to abandon their bearish bets. At present, 6.5% of the stock's float is sold short, representing more than a week's worth of pent-up buying demand, at AA's average daily trading volume.

Traders interested in speculating on further upside in Alcoa Inc (NYSE:AA) might consider the in-the-money September 12 call, currently asked at $2.42 per contract. Note that this time frame encompasses the company's next earnings report, scheduled for the evening of July 8.

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