Alcoa Inc. (AA) – A double-whammy of positive news on top of an already buoyant stock market saw investors forge gains of 9% to $15.90 for shares of Alcoa in early trading on Monday. The stock suddenly looks comfortable above $15 for the first time this year. The company announced a $10.8 billion joint-venture with a Saudi mining company in which the two companies would develop an aluminum industrial complex in Saudi Arabia. Investors are clearly putting stock in the words of Alcoa’s CEO who referred to a change in the operating dynamics and cost base within the aluminum industry. Broker Morgan Stanley also upgraded its status to “buy.” In examining today’s most active options on the stock it appears that one trader was already positioned for an improvement in the prospects for Alcoa. Some 13,000 call options reserving buying rights before they expire in January at the fixed strike price of $15 were sold for a $1.30 premium. With substantial open interest already present at the strike it’s of interest to us that these calls traded through the bid price at what was a deep in-the-money option at the time. It appears that this investor read the prospects for Alcoa pretty well. Those call options just about doubled in today’s trading and earlier this month traded at as low as 20 cents per contract.
PowerShares DB US Dollar Index Bull ETF (UUP) – With the exception of a weak performance against an inspired Canadian dollar, the U.S. dollar is up across the board, although not so that you’d know it according to a marginally changed dollar index. Yet we continue to see heavy volume in the PowerShares ETF where option traders have recently made significant trades in the expectation that the dollar might rise. With the ETF trading at $23.02 today the most heavily trafficked call option series is at the 23 strike where investors over recent weeks have amassed positions amassing to a reading of open interest of some 469,000 contracts. In today’s action in which the UUP is one of the most active, it appears that investors are closing out some long call positions by selling out profitable plays. The calls appear to be trading largely to the 55 cent bid and the volume is buoyant despite the fact that the dollar index is not going anywhere today. Having said that the ongoing rise in yields is a comfort to investors hoping the dollar will trade higher. At 4.63% the 10-year yield looks set to breach overhead resistance that could see another 20 basis points on yield pretty quickly. The UUP was trading at $22.05 just three weeks ago.
MannKind Corp. (MNKD) – Bearish option traders populated biopharmaceutical company, MannKind Corp., today with shares of the firm up a slight 0.10% to $9.32. Investors threw in the towel on out-of-the-money calls in the February contract and initiated pessimistic trades using in-the-money calls. Approximately 3,600 calls were sold at the February 12.5 strike for one dollar per contract. Open interest at that strike of 6,381 contracts suggests the sale of the calls is likely the work of traders abandoning previously established bullish positions on MNKD. Meanwhile, investors expecting shares of the biotech company to move substantially lower by expiration in February, sold roughly 7,000 in-the-money calls at the February 7.5 strike for an average premium of 1.97 apiece. Option implied volatility on the stock fell 26% during the first half of the session, from an intraday high of 125.94%, to the current reading of 99.90%.
Level 3 Communications, Inc. (LVLT) – The fixed line telecommunications firm suffered a 2.75% decline in the value of its shares today to arrive at the current price of $1.42. LVLT appeared on our ‘hot by options volume’ market scanner after one investor dabbled in put options on the stock. It looks like the trader rolled a long put position in the near-term January contract out to the June 2010 contract. The investor likely sold 7,900 puts at the in-the-money January 2.5 strike for a premium of 1.05 apiece in order to buy the same number of puts at the June 2.5 strike for 1.15 each. It is unclear how much the investor initially paid for the January 2.5 strike put options. However, the trader could be banking gains on the original bearish stance given the in-the-money status of the puts today. The net cost of the calendar roll – in isolation – amounts to 10 cents per contract, and positions the trader to amass profits to the downside beneath the breakeven point at $2.40.
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