Those who boughtAlcoaJulycall options on Monday managed to catch a break in spite of lackluster quarterly results. Late Monday the aluminum maker posted revenue figures below analysts' estimates -- the very type of news that can hammer a company's shares and evaporate the value of call options.
Instead, Alcoa shares have slipped less than 1% thanks to a report in the Times of London that BHP Billitonis looking for a private equity partner for a possible $40 billion Alcoa buyout offer. The paper reported that BHP wants a private equity partner to spin off Alcoa's packaging assets into order to concentrate on mining and refining.
"When you throw in the phrase 'private equity,' speculators come in looking for higher share prices," said Andrew Wilkinson, senior analyst at Interactive Brokers Group. "More than six calls have traded versus the puts today. Implied volatility has slipped only about 7% to 42.5%, which is still more than one and a half times the average daily movement shown in the underlying share price."
Implied volatility is a gauge of the anticipated price movement of a stock, with higher percentages indicating greater chance of price fluctuations.
Wilkinson holds no shares of any stock and holds no options.
"It's not only that implied volatility remains in a levitated state in Alcoa options, but that volume remains heavy," he said. "Given the magnitude of volume on the call side, buyers are looking for a bid to come through and for it to happen quickly."
The heaviest trading volume remains centered in July call options, which will expire one week from this Friday. More than 21,000 July 42.5 calls and over 6,000 July 45 calls traded Tuesday.
Wilkinson said, "it looks like the 45 strike is the top and is where they’re really expecting a bid, though there is a smattering of 47.5 and 50 calls in the July and August contracts that have traded."
Earnings Season
Second-quarter earnings season has kicked off, and a number of tech stocks have been on the move in the options markets ahead of their reports.
Stacy Gilbert, chief options strategist at Susquehanna Financial Group, has been tracking what appears to be bullish options activity in cellular phone technology company Broadcomand online auctioneer eBay.
"Broadcom is interesting because we're not only seeing July, but we're seeing August call buyers," said Gilbert. "The price movement that the market is looking for in the stock is around 7-1/2%, which is somewhat in line with where Broadcom typically moves. Just to put it in perspective, Broadcom usually averages about 15,000 options contracts a day -- on Monday 60,000 options contracts traded."
Broadcom is due to report earnings next week.
Gilbert is intrigued by buying in August calls where she said there is no known potential catalyst. While she acknowledged Broadcom's ongoing patent battle with Qualcomm, she said those issues have not moved the stock significantly. "There seems to be some other focus besides earnings and besides the legal issues that investors are focusing on and positioning bullishly."
Ahead of earnings, Gilbert said eBay options have been giving off bullish signals.
"We've got call buyers in eBay. These are much more focused on earnings, with the concentration being in the July options -- 30 and 35 call strike buyers here. They're really pushing the volatility higher where the expectation is for a move right around 7-1/2%, which is higher than the average move, which is closer to 6-1.2%.
eBay will also post quarterly earnings next week.