Tuesday, May 3, 2011

Alcoa (AA) - Takeover Rumors Push Vol and Skew

AA is trading $17.93, up 4.1% with IV30™ jumping up 30.9%. The LIVEVOL® Pro Summary is below.


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Alcoa Inc. (Alcoa) is engaged in the production and management of aluminum, fabricated aluminum, and alumina combined, through its participation in mining, refining, smelting, fabricating, and recycling.

The vol and stock jump are due to a takeover rumor. Here's a quick snippet from a Reuters article:
U.S. aluminum producer Alcoa Inc shares rose as much as 3.2 percent in early trade on Tuesday, with three traders in Europe citing market talk of bid interest from miner Rio Tinto.

Rio Tinto, whose shares in London were down 1.1 percent, was not immediately available for comment.

"There is a rumor going around that Rio Tinto has secured a $25 billion syndication loan to acquire Alcoa for $25.5 per listed share," a trader said, adding that he assumed the currency of the loan in the market talk was in dollar.
Source: Reuters

I posted a trade on TheStreet.com, so no specific trade analysis here, but this is still worth a look. The company has traded over 195,000 contracts on total daily average option volume of just 62,076. Calls have traded on an 8.7:1 ratio to puts or more than 175,000x on total daily average volume of 35,718. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates the action. May 20, 19 and Jun 18 calls are the most active respectively. May vol is up 11.5 points (42.3%) while Jun vol is up 6.9 points (25.1%). The order flow seems to be substantially purchases based on the vol rise.

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

We can see a substantial rising skew bend to the OTM calls. The vol is most pronounced in May, then somewhat muted in Jun and Jul but still apparent. I've included the Skew Tab as of 4-15-2011 ( about three weeks ago) below. We can see that the skew was a bit parabolic, but not as pronounced to the upside as it is on today's action.

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).

It's interesting to note that even though the IV30™ is popping today, it was even higher as of 3-16-2011 when it reached 43.48. That's still 21.5% above today's IV30™... So, in English, the vol can go higher.

This is trade analysis, not a recommendation.

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