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LEAPS puts see action in the aluminum name
Beth Gaston Moon is the Senior Editor for the Options News Network. Beth was a member of the research department at Schaeffer's Investment Research for more than a decade. January 29, 2010 9:24 EST Related Symbols: AA
Weakness in the commodities sector, particularly in aluminum, contributed to yesterday’s drop in Alcoa (NYSE: AA), which gave up 2.86% on the day, shedding 38 cents to close at $12.92. Implied volatility was little affected across the board, however, as the February at-the-money (13-strike) straddle closed at $1.25, equal to Wednesday’s close.
Amid this weakness, some long-term put buyers emerged, trading nearly 5,200 contracts at the January 2012 10-strike put, which had come into the session with open interest of just 1,591. This morning, open interest had expanded to 6,600, meaning nearly all of yesterday’s volume was traded to open.
Within the first two hours of trading yesterday, about 5,000 contracts traded at this strike, the majority of which came across the tape in a block of 3,653 puts, which traded at $1.35 per contract.
It is possible that these are protective puts, opened as a hedge for an existing long stock position. If not, however, they are out-of-the-money by more than 20% and would require a steep drop off in AA shares between now and when these options expire in nearly two years. Breakeven is currently $8.65, or a whopping 33% below where AA is currently trading. Of course, with nearly two years until expiration, these puts could increase in value long before expiration and the investor could opt to take profits.
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