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Alcoa Inc (AA) Option Traders Go Bargain Hunting

Premium on Alcoa Inc's short-term options is relatively inexpensive at the moment

by 8/19/2014 11:04 AM
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Alcoa Inc (NYSE:AA) is following in the bullish footsteps of the broader equities market today, and option traders are responding in kind by scooping up calls at a rate three times the intraday average. By the numbers, around 18,000 calls are on the tape, compared to fewer than 2,000 puts. Per the equity's 30-day at-the-money implied volatility -- which is up 3.4% to 24.2% -- short-term options are in high demand.

Most active is AA's September 15.50 call, which is being bought to open for a volume-weighted average price (VWAP) of $1.04, making at-expiration breakeven $16.54 (strike plus VWAP). Gains are theoretically unlimited north of here, while losses are capped at 100% of the premium paid, should AA be sitting south of the strike at the close on Friday, Sept. 19 -- when front-month options expire.

Regardless of where the stock lands at expiration, today's call buyers can rest easy knowing they scooped up these bets at a relative bargain. Specifically, Alcoa's Schaeffer's Volatility Index (SVI) of 23% ranks lower than 95% of similar readings taken in the past year, meaning the equity's short-term options are pricing in rather low volatility expectations at the moment.

On the charts, Alcoa has been a technical titan in 2014, with the shares up nearly 54%. More recently, the equity entered a brief period of consolidation after tagging a three-year peak of $17.22 on July 23, but a quick bounce off its rising 40-day moving average helped AA resume its withstanding trajectory. In today's session, Alcoa Inc (NYSE:AA) was last seen up 0.2% to trade at $16.35.


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