Earnings play detected in metal bellwether

Another day, another bounce in metals.

The sector’s run hot and cold in the past 18 months. It had a frenzied run from long-term lows, only to crash in late winter. It’s been warming of late, and yesterday options players looked for a metal mainstay to start rocking again.

Aluminum giant Alcoa (NYSE: AA) was their target. Buyers began piling into the July 36 calls for $0.35 less than an hour into Tuesday’s session. Larger blocks hit for $0.39, $0.45, and eventually $0.50. By the time lunch rolled around, over 22,000 contracts had changed hands. 

Calls fix the price where a security can be purchased. Traders use them to generate leverage and to keep a lid on potential losses. Say they have an inkling AA will break out. Those calls will double if they’re right and the shares climb 14 percent to $37. Up another 2 percent to $37.50, and their money triples. 

But should they be wrong and the stock remains trapped below $36, the options will expire worthless. Not ideal, but the pain could be much worse owning shares during a selloff. (Breakeven is at $36.50.) 

It’s probably not a coincidence that the calls expire just two days after earnings. AA jumped higher following its last two sets of results, so it appears someone expects a similar response this time around.

AA was moving as the calls crossed the tape and continued to plow higher, even as the broader market stalled. It ended the session up 1.44 percent to $31.63.

Alcoa (AA)) YTD-year chart

Source: OptionsHouse by E*TRADE

While no news explained the AA pop, there's been a steady trickle of positive headlines in the sector. Much of it centers around hopes that the White House will slap duties on foreign steel. That prompted some positive analyst commentary,1 along with bullish options activity in companies like U.S. Steel (NYSE: X) and Nucor (NYSE: NUE).

The group enjoyed another boost yesterday after U.S. Commerce Secretary Wilbur Ross suddenly canceled a trip to Germany.2 (A prelude to tariffs?) All told, the S&P Metals & Mining Index is eking out a small edge over the broader market so far in June.

Some other noteworthy activity was detected in iron-ore producer Rio Tinto (NYSE: RIO). This time it looks like a trader is neutral-to-bullish because they rolled short puts: 11,000 of the December 40s were sold and an equal number of the July 40s were bought. The transaction, which resulted in a net credit of $2.28, is looking for the stock to remain above $40 through the end of the year. RIO climbed 2.32 percent to $40.19.

Bottom line: Metals have shown signs of returning to favor this month, and traders are following the trend.


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1. Benzinga: Steel Analyst Says The Market's Become Too Bearish On China, Upgrades Entire Sector. 5/24/17. The Times of India: Steel solid as Deutsche upgrades US Steel, AKS Holding to buy. 6/23/17.

2. Reuters: U.S. Commerce Secretary cancels Germany trip. 6/27/17.