Bullish options bettors have bombarded aluminum company Alcoa Inc. (AA: sentiment, chart, options) today. In afternoon trading, the metal mogul has seen more than 18,500 calls cross the tape – more than 3.5 times its average daily volume of fewer than 5,200 contracts.
Delving deeper into the data, it seems that most of today's optimistic option activity centered on Alcoa's December 10 call, which has seen more than 16,000 contracts change hands so far today. This strike is currently home to peak call open interest in the front-month series, with nearly 50,000 contracts in residence.
However, after further research, it seems that today's bias toward bullish bets is nothing new for the Dow component. The stock's Schaeffer's put/call open interest ratio (SOIR) currently stands at an annual optimistic peak of 0.33, indicating that calls virtually triple their put counterparts among options slated to expire within 3 months.
So, why the recent surge in call activity? Options traders could be responding to the latest announcement from President-elect Barack Obama. Over the weekend, Obama unveiled plans for the largest U.S. public works spending program since the creation of the interstate highway system – an announcement some suggest could indicate a jump in construction projects utilizing steel and other metals.
As a result of the news, the shares of AA have surged roughly 20% higher, adding $1.60 to hover near the $9.75 level. However, today's trek into positive territory is a rare voyage for the struggling security, which has backpedaled about 68% since breaching long-term support in the round-number 30 area. What's more, the equity still faces resistance from its declining 10-week moving average, currently dawdling in the $10 neighborhood.
Meanwhile, despite the blue chip underperforming the S&P 500 Index (SPX) by roughly 60% during the past 60 trading sessions, some analysts remain optimistic toward AA. In fact, even before today's announcement from the soon-to-be Commander in Chief, Zacks reports that 6 out of 13 ranking analysts deemed the stock worthy of a "buy" or better rating.
In addition, according to Thomson Financial, the average 12-month price target on the equity stands at $16.46 – a level AA hasn't closed a session above since early October. In order to attain this lofty goal, the shares would need to rally about 69% from today's high.
Furthermore, regardless of today's broad-market and Barack-induced boost, Alcoa still has some fundamental issues to sort out. The company had been counting on receiving some discarded aluminum assets amid a merger of BHP Billiton (BHP) and Rio Tinto PLC (RTP) – an engagement that's since collapsed. What's more, according to reports, aluminum inventories are currently flirting with record-high levels, while prices remain at virtually their lowest level this year.
In conclusion, should the shares of AA fail to capitalize on today's surge into the black, or should the company neglect to successfully address its fundamental hurdles, the lingering bulls could abandon ship. An unwinding of optimism – whether in the options arena, or via downgrades and/or price-target cuts – could spark a fresh wave of selling pressure on the security.
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