Metal stalwart just hit new highs
08/09/17

Tech has dominated attention for months, but some traders are turning to another, very different sector.

Industrial metals like steel, copper, and aluminum, after all, began 2017 with a bang as investors hoped that tax cuts and regulatory reforms would drive economic growth. Gridlock in Washington swamped the group by late spring, although sentiment has shown signs of turning in the last month as the S&P Metals Mining Index almost doubled the gain of the broader market.

Alcoa (NYSE: AA) is a major name in that bucket, and yesterday options volume spiked as the famed aluminum maker broke out to new highs. Traders started with the August 40 calls, amassing more than 13,000 contracts for $0.40 about halfway through the morning. They returned to nibble an additional 2,000 of the August 39.50 calls for $1.10 about an hour later.

Calls fix the price where a security can be purchased. They can spike in value if a stock rallies, or evaporate to nothingness if shares move in the wrong direction. Here’s what may be at play in the options detected on Tuesday:

  • The August 40s will double if AA climbs just 2 percent to $40.80 by expiration. They’ll breakeven at $40.40 and turn worthless if the stock closes below $40.
  • The 39.50s have more intrinsic value, so they have less risk of zilching out. That cost the investor more in premium ($1.10 versus $0.40) and also requires a bigger move to double. This time AA must climb more than 4 percent to $41.70. Breakeven is at $41.70. The magic line between “something” and “nothing” is at $39.50.
Alcoa (AA), 11/2/16 - 8/8/17, chart

Source: OptionsHouse by E*TRADE

AA ended the session up 4.19 percent to $39.58, its highest close since emerging as a stand-alone company in November. (The legacy company, renamed Arconic (NYSE: ARNC), now manufactures components for aerospace, automotive, and building firms, if you’re curious about such things.)

Some readers may be raising their eyebrows at yesterday’s calls because both expire at the end of next week. What’s going on in the world of metals that could lift AA in that time frame?

Industry watchers point to a few catalysts. First, physical metal prices have been clawing their way back from a gut-wrenching selloff in late May and early June.1 Second, global economic data from around the world has shown steady gains – especially in the key behemoth of China.2 Third, lots of voices are calling for a turn in commodities and materials stocks. Some investors say they’re too cheap compared to the broader market.3 Others say their financials are improving.4 Others simply like the space because they believe the post-2008 deflationary death-spiral is at an end.5 On top of all that, AA’s last quarter was decent in Wall Street's eyes.6

Bottom line: Metals have flown beneath the radar for months, and now traders are looking for a key name to move higher.

 

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1. Mining.com: Iron ore soars at $76 a tonne. 8/7/7.

2. Business Insider Australia: Iron ore and coking coal futures are going nuts as Chinese steel output hits a record high. 8/8/17. Marketwatch: Copper prices climb on Chinese economic data. 7/25/17.

3. Mining.com: CHART: Commodity prices slump to 50-year low against US stocks. 6/5/17.

4. Wall Street Journal: Bond Upgrades Relieve Pressure on Commodity Firms. 8/3/17.

5. CNBC: Wall Street sees signs of inflation at long last. 8/1/17.

6. Bank of America Merrill Lynch: Input cost hit drives guidance to lower half of the range; aluminum outlook solid. 7/19/17.