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Alcoa Inc (NYSE:AA) is in rally mode this morning, following news the aluminum giant will purchase jet engine parts maker Firth Rixson from Oak Hill Capital Partners in a multi-billion dollar deal. In fact, the equity earlier tagged a nearly three-year peak of $15.18, before easing back to its current perch at $14.99. Against this backdrop, puts and calls are trading at eight times and five times the average intraday pace, respectively, and per AA's rising 30-day at-the-money (ATM) implied volatility (IV) -- which is up 3.4% to 27.2% -- short-term options are in demand.
The most active AA strike thus far is the July 15 put, where 5,758 contracts have changed hands. Nearly all of these have gone off at the ask price and IV is trending higher, hinting at the purchase of new positions. These ATM puts are being scooped up for a volume-weighted average price (VWAP) of $0.44, making breakeven at the close on Friday, July 18 -- when front-month options expire -- $14.56 (strike less VWAP). Profit will accrue on a move down to zero, while losses are capped at the initial premium paid, should AA settle north of the strike at expiration.
On the call side, the equity's weekly 6/27 15.50 strike is being bought to open, as traders roll the dice on another multi-year peak by week's end. The VWAP for these out-of-the-money calls is $0.02, making at-expiration breakeven at this Friday's close $15.52, or the strike plus the premium paid. Gains are theoretically unlimited with each step north of here, while risk is limited to 100% of the premium paid.
Looking ahead, second-quarter earnings season will unofficially begin when Alcoa Inc (NYSE:AA) steps into the confessional after the close on Tuesday, July 8. For the company's second quarter, Wall Street is calling for a per-share profit of 12 cents -- a nickel higher than AA's year-ago results.