OptionsHouse

Options Trading News

December 27, 2012  Thu 2:45 AM CT

AA: SEE CHART GET CHAIN FIND STRATEGIES
Slowly but surely, one investor is apparently becoming convinced that Alcoa is bottoming out.

optionMONSTER's tracking programs detected the sale of 3,000 April 13 puts for $4.26. An equal number of January 12.50 puts were bought at the same time for $3.78 but volume was below open interest in those.

AA rose 1.28 percent to $8.73 yesterday, meaning that those puts are deep in the money. The aluminum maker has been trading in its current range for more than a year after crashing in mid-2011.

It appears the investor originally sold puts before that drop, betting that AA would hold its ground. But then after it fell, he or she rolled the position forward in time to avoid being forced to buy the shares.

The trader has probably adjusted the position on several occasions, biding time until the stock rebounds. Given that in-the-money puts have a close inverse correlation to the share price, they're now effectively long the stock and will profit on a dollar-for-dollar basis if AA rallies back toward $13.

While the strategy didn't work out as the investor originally planned, he or she was able to manage it more effectively thanks to the flexibility afforded by options. (See our Education section for more on how options can help improve the portfolio performance.)

AA's option volume yesterday was almost twice its daily average.
Share this article with your friends


OptionsHouse

Premium Services

Education & Strategy

Investor deficiency in premium collection

Most investors have heard about selling options as a form of income generation. You hear it from brokers and financial advisors as a way to generate income without selling off pieces of your nest egg, dwindling through your retirement accounts, and then being stuck figuring out how to financially afford the rest of your life...

View more education articles »