Traders look for the metal party to keep rocking
08/23/17

Some traders apparently think the party’s just getting started in metals.

The market’s abuzz with higher prices. CEOs are touting richer profits. Economists have warm fuzzies about global growth. Value buyers are rediscovering names abandoned at the start of the decade. That’s the story in a nutshell.

Yesterday options traders returned to one of their favorite names in the space, aluminum giant Alcoa (NYSE: AA). Going to work less than an hour after the opening bell, they snapped up 10,000 October 42 calls for $1.30, targeting a breakout to new highs by early autumn. Here’s what they seem to be thinking:

  • Calls fix the price where a security can be purchased. They can shoot up in value if a company rallies but dwindle to naught if no move occurs.
  • Tuesday’s contracts will double if AA climbs 11 percent to $44.20 by expiration and triple if the shares hit $45.90. Breakeven is at $43.30, and they’ll turn worthless if the stock remains below $42.
  • AA rose 3.38 percent to $39.77 yesterday, and is pushing the top of its range since getting spun off as an independent company in November.
Alcoa (AA) 11/7/16 - 8/22/17 chart

Source: OptionsHouse by E*TRADE

The S&P Metals & Mining Select Index hit the skids in mid-2011 as China slammed the brakes on its economy and Greece’s debt crisis cast a pall across Europe. It slid lower for five straight years before bouncing in early 2016, and proceeded to double off its lows. The sector paused in the spring, but has been coming back to life this summer.

Here’s a sampling of some of the positive stories as they’ve hit:

  • Late June: Seemingly out of nowhere, iron ore goes on a two-week rampage. Heads turn.1
  • Mid-July: European steelmakers revise their demand estimate sharply higher. Separately, lean inventories boost prices, and Chinese environmental rules create near-term incentives to consume more metal.2
  • Late July: Industry gurus warn sentiment is too bearish and forecast higher prices. Copper spikes on Chinese demand. Metals giants Freeport-McMoRan (NYSE: FCX) and United States Steel (NYSE: X) crush earnings estimates. AK Steel (NYSE: AKS) jacks up prices for flat-rolled products, effective immediately.3
  • August: Glencore, another industry heavyweight, raises their 2017 commodities forecast. Bond nerds gush about the sector's creditworthiness. Money plows into portfolios tracking the space.4
  • This week: BHP (NYSE: BHP), the planet’s top mining company, spikes as investors look past weak earnings and focus on the stronger macro backdrop. The Wall Street Journal trumpets the news with a pair of stories suggesting the trend will continue.5

At least one other big transaction appeared yesterday, with 5,000 1September 15 puts sold in FCX for $0.37 and $0.38. Puts fix a level where investors can exit a stock, but selling them reflects a belief that downside is limited. In this case, traders are looking for the shares to remain above $15 through the end of next week. FCX closed up 2.31 percent to $15.07.

Bottom line: Traders are finding opportunities in metals again as experts turn bullish on the space.

 

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1. Business Insider Australia: Iron ore is suddenly in a bull market. 6/30/17.

2. Reuters: Eurofer ups EU steel demand forecast, warns on 'disastrous' U.S. tariff plan. 7/10/17. Barron's: Why One Bear Thinks Iron Ore Rebound Can Last. 7/11/17. Reuters: METALS-Copper rebounds as stock build-up halts, Chilean miners to strike. 7/11/17.

3. Bloomberg: Bulk Commodity Prices to Defy Lower 2H Expectations: Clarksons. 7/17/17. Marketwatch: Freeport-McMoRan shares gain 2% after company swings to a profit in Q2. U.S. Steel shares rally after earnings, outlook beat Street view. 7/25/17. Marketwired: AK Steel Announces Price Increase For Carbon Steel Products. 7/21/17.

4. Wall Street Journal: Glencore Profits Rise on Commodities Boom. 8/10/17. Bond Upgrades Relieve Pressure on Commodity Firms. 8/3/17. Marketwatch: Seeking waves to ride, traders ditch stocks for commodities. 8/10/17.

5. Wall Street Journal: Booming Metals Rally Signals Optimism on Global Growth. 8/21/17. Miners Are Flush With Cash Again. 8/22/17.