U.S. News

Options Report: Alcan, Alcoa, ICE, The 'VIX'

Jim Kingsland

Holders of Alcan call options are happy today, especially those who picked up "out-of-the- money" Alcan calls.

Out-of-the-money calls are options with strike prices above where shares of the underlying stock are trading.  The further above the stock's current price, the riskier the bet, since chances lessen that the stock will reach those higher strike prices.

Alcan stock and options traders received a heads-up from media reports that originated from Canada Wednesday, where Alcan is based, citing people familiar with the situation who said Rio Tinto was preparing a bid for Alcan. Not only was call volume for Alcan calls above normal on Wednesday, but the heaviest concentration of options volume occurred in calls that were either "in the money calls" (options with strike prices at or below the underlying stock), or close to being in the money. The shares finished at $89.60 on Wednesday.

"They knew something was coming, but didn’t necessarily believe a bid for $100-plus was coming, so they bought lower strikes," said Larry McMillan, president of McMillan Analysis Corp. "The heaviest volume was in the August 90 calls. People were buying those at a price of $3 or so thinking that if a bid of at least $93 per share came through they would be OK." 

The August 90 calls are up nearly $6 to an offer of $11.70, producing a one-day gain of 178% for each contract.

So few options players thought a $101-a-share, $38 billion cash bid would materialize for Alcan -- well above Alcoa's $29 billion cash and stock bid -- that less than 10% of the total volume in Alcan calls traded in the 95 strike on Wednesday.

Today the July 95 calls were up 1033%.  Volume yesterday in those calls totaled just 140 contracts.


Still to be seen is whether Alcoa will decide to top Rio Tinto's offer. A spokesman for the company said Alcoa's response would come later Thursday. 

That has led to speculation that if Alcoa bows out, it could itself become the target of a buyout. BHP Billiton has recently been mentioned as a possible Alcoa suitor.

"The volume in Alcoa options is just insane in there now," said McMillan. "You're already (as of 11 am New York time) looking at probably 70,000 contracts traded -- it's a huge number.  You’ve already done the day's average, and it wouldn't be surprising if we saw 150,000 contracts traded."

McMilllan said, "people are playing it the same. The biggest volume is concentrated in calls with 45 and 47.5 strikes. They're not too sure about premium should an offer come for Alcoa, but they're thinking moderately higher and taking a shot."

InterContinental Exchange

Intercontinental Exchange could be finding itself in a situation similar to Alcoa's; that is, a company defeated in a takeover battle that's now itself vulnerable to being scooped up.

InterContinental, better known as ICE, lost a takeover battle for CBOT Holdings, operator of the Chicago Board of Trade, to Chicago Mercantile Exchange Holdings.

"It's the same kind of argument with ICE, which is up another $4 to brand new highs," said William Lefkowitz, an options strategist at brokerage firm vFinance Investments. "CME beat ICE for BOT, and left on their own, ICE is a company that becomes a potential (takeover) candidate.  Options are being aggressively bought."

Lefkowitz noted the "tremendous amount of consolidation in the exchanges out there." He added, "CME could eventually grab ICE -- not right away -- or ICE could go after the combined Chicago Merc and Board of Trade. People have had fun guessing on this one."

On speculation that the InterContinental Exchange could be a takeover target, volume has exceeded open interest in a variety of calls, including the out-of-the-money July 180 calls, plus the August 170, 175 and 195 calls.

There has also been downside hedging with active volume in the ICE July 170 puts.

Volatility Index

The Chicago Board Options Exchange Volatility Index , which has advanced from closing readings as low as 9.9 last December to over 17 this week, pulled back Thursday by over 7% to 15 as the stock market racked up triple digit gains.

The volatility index is calculated using a wide variety of implied volatilities from S&P 500 index options and is designed to show expectations for 30-day volatility.  It typically rises when the market falls, or when investors are worried that markets could move lower.  The VIX generally falls in tandem with rises in the stock market, or when investor fear abates.

But even with today's VIX decline, activity in the VIX options remained biased toward trades of call options -- July contracts call volume outpaced put volume by a margin of 12 to 1.

Open interest in July VIX calls overwhelms open interest in puts by a margin of more than 6 to 1. High call open interest in VIX options has translated into an overall (including months beyond July) put-to-call ratio of just above 0.5 -- providing another indication that investors have largely been betting on a further rise in the VIX, signaling potential bearish overtones for the stock market.

"When there’s an expectation for a market decline, there's a rise in implied volatility on VIX itself and for the options on the VIX which has been the recent trend," said Scott Fullman, director of investment strategy at I.A. Englander. "You’ve been seeing speculation that the market is going to become more volatile.  That is implying that there are people out there who are trying to use the VIX to (outperform the market) should the market have a significant decline."