Stocks quoted in this article:
Alcoa Inc (NYSE:AA) is in rally mode this morning, following the aluminum firm's second-quarter earnings beat last night. At last check, the shares were 4.3% higher at $15.48, and had earlier touched a nearly three-year high of $15.50. Not surprisingly, activity is heating up in AA's options pits -- especially on the call side, where contracts are trading at faster than seven times the normal intraday clip.
Among the most active options is the weekly 7/11 15.50-strike call, where roughly 8,700 contracts are on the tape. The strike is seeing mostly buy-to-open activity, as speculators wager on higher highs through the end of the week. By initiating the calls for a volume-weighted average price (VWAP) of $0.08, the traders expect AA to finish above $15.58 (strike plus VWAP) when the contracts expire this Friday afternoon. In terms of risk-reward, theoretically unlimited gains are possible north of breakeven, while losses are capped at the initial cash outlay, should the options expire out of the money.
Today's rally is being helped by a shift in sentiment on Wall Street. Earlier, Alcoa Inc (NYSE:AA) was met with a round of price-target hikes from no fewer than five brokerage firms. Nevertheless, the equity's consensus 12-month price target sits at just $13.68 (a discount to the stock's current perch), and nearly two-thirds of covering analysts rate the shares a "hold" or "strong sell." In other words, AA could still benefit from additional price-target hikes and/or analyst upgrades.