Inside the Titanic Trade on Alcoa Inc (AA) Call Options

It appears one options trader rolled out a huge call position on Alcoa Inc (AA)

by Alex Eppstein

Published on Sep 13, 2016 at 2:15 PM
Updated on Jun 24, 2020 at 10:16 AM

Alcoa Inc (NYSE:AA) is facing an avalanche of options trading activity today. Calls are the options of choice, being exchanged at a mind-bending 17 times the expected intraday rate.

Digging into the action, two 50,000-contract blocks of the October 11 call were sold just after noon, while matching lots at the January 2017 11-strike call were purchased. According to Trade-Alert, the former were closed while the latter were opened, suggesting the trader rolled his out-of-the-money position out by three months.

While it's possible this could be a speculative play, it's perhaps more probable that this is the work of an institutional investor who's short AA stock, given the size of the trade. Underscoring this theory, 110 million Alcoa shares are sold short, and the $11 level has served as a stubborn layer of resistance in the past year. To put it plainly, today's trader may be rolling out his monstrous call position to protect a short stock position against an unforeseen breakout north of $11.

aa daily september 13

While AA is far from clearing $11 -- down 2.6% at $9.53, amid broad-market headwinds -- it's impossible to deny the stock's long-term strength. Since hitting a six-year low of $6.14 in January, the mining shares have muscled 55% higher. Plus, it appears the stock has located a foothold at its 200-day moving average, which could act as a springboard.

Assuming Alcoa Inc (NYSE:AA) gets back on track, an unwinding among unhedged short sellers could fuel a powerful short-squeeze rally. At the stock's average trading level, it would take 8.5 days for these bearish bets to be covered, hinting at ample cash on the sidelines.

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