Friday, October 29, 2010

Alcoa (AA) - Skew Bends and Bullish Trades

AA is trading $13.08, up 3.4% with IV30™ up 11.8%. The LIVEVOL™ Pro Summary is below.


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I found AA on a new custom scan I built searching for IV30™ moves:

Custom Scan Details
Stock Price >= 5
IV30™ Percent Change >= 10%
IV30™ >= 10
Average Option Volume >= 1,200
Days After Earnings >= 10 and <= 70
Industry != Bio-tech

The company has traded over 93,000 options on total daily average option volume of just 41,704. Calls have traded on a 5:1 ratio to puts, net premium and net deltas are long - there are calls buyers out there it seems. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action in the Nov 13 and 14 calls, though the OI is larger than the trade volume. Note that Nov vol is up 5 points while Dec is up just 2.7.

The Skew Tab snap (below) illustrates the vols by strike by month.

This is where I think a trade opportunity may exist. The upside is super bid in Nov, with the ATM calls priced at 36 vol and the 14 calls priced at 39 vol (normally vol goes down as strike increases).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock made a nice move up off of earnings earlier this month and today it's found a little pop. On the vol chart (bottom portion) we can see the IV30™ has just now popped past the HV20™ and HV180™, though it's still well below the "earnings vol" level.

Possible Trades to Analyze
1. If you like the news coming out of AA and in general for the industry, this could be a nice time to do a plain vanilla Nov 13/14 call spread and pay ~$0.31 for more than a 2:1 MaxGain:MaxLoss with $0.08 of parity already built in. It's a small bet that gets you long deltas and sells higher vol than it purchases.

2. A bit more involved, do #1 and sell the 2 of the Nov 14 calls... That makes a net debit of just ~$0.15, but does leave naked upside in a rallying stock with vol increasing and skew bent up. Lol... How was that for two sided analysis?

3. Also, for the very bullish, a 13/14 c/s with a 12 strike put sale is more bullish but pays less premium.

4. If looking to do a calendar, the Nov 15/Dec 15 c/s (buy Dec) purchases 38 vol and sells 45. This is a skew trade, looking to sell that divergence. It's ~ $0.09 bet and is probably my favorite of the bunch, but I am allergic to long deltas so don't mind me... This trade may be easy to get out of on the week of Nov. expo and just shut it down, depending on stock price.

This is trade analysis, not a recommendation.

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