Earnings Preview: Alcoa Inc (AA)

Option traders have been busy ahead of Alcoa Inc's (NYSE:AA) earnings report Monday

by Kirra Fedyszyn

Published on Apr 8, 2016 at 12:47 PM
Updated on Jun 24, 2020 at 10:16 AM

Lightweight metals producer Alcoa Inc (NYSE:AA) is set to unofficially kick off earnings season on Monday. And while the stock's strong technical performance in 2016 hasn't done much to shift overall sentiment, option traders have been busy ahead of AA's financial report.

Since hitting a six-year low of $6.14 in January, AA has rallied 55%, and was last seen at $9.51. The shares are now staring up at a familiar roadblock in the $10-$10.50 area, which halted their progress in late 2015. However, AA's 40-day moving average has ascended into the area, and a pullback to this trendline has preceded positive returns in the past.

According to Schaeffer's Senior Quantitative Analyst Rocky White, Alcoa Inc has pulled back to this moving average eight times over the past three years. Following seven of those instances, the stock yielded a positive return after 21 days. In fact, the average 21-day return after this signal was 5%. Meanwhile, AA appears to have also found a foothold atop its 200-day moving average, which is on the verge of a bullish cross with the 40-day. These technical indicators could signal more gains ahead for the shares.

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In the option pits, traders were busy on Thursday, with calls crossing at three times their typical intraday pace. In fact, some 75,000 AA calls changed hands, outpacing puts nearly 3-to-1. And much of this action happened at the July 11 call, where it appears new positions may have been bought to open. In fact, this strike saw the largest increase in open interest for the day, with nearly 20,000 new contracts added. "Vanilla" bulls buying the calls are hoping AA topples $11 within the next few months.

However, the preference for calls is a change of pace for the equity. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.89 ranks higher than 91% of the past year's readings. Moreover, AA's Schaeffer's put/call open interest ratio (SOIR) of 1.00 ranks in the top percentile of its annual range, meaning that near-term traders have never been more put heavy in the last 12 months.

Ahead of earnings, AA open interest is at an annual high. Plus, near-term traders are paying up to play AA. The equity's Schaeffer's Volatility Index (SVI) of 66% is higher than 85% of all other readings from the past year. 

Meanwhile, it looks like the options market is pricing in a one-day post-earnings swing of 8.1%, per the stock's near-term at-the-money straddle. That's a bit wider than AA's average one-session move of 4.5% after its eight most recent reports.

Outside of the option pits, sentiment has been stacked against AA, as well. Of the 12 analysts providing coverage, half rate the security a "hold" or "strong sell." Short interest has been falling -- down about 18% over the past two reporting periods -- but these bearish bets still account for 12.5% of AA's available float. At Alcoa Inc's (NYSE:AA) typical pace of trading, it would take nearly a full week to buy back all those shorted shares.

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