Shares of aluminum producer
Alcoa Corporation (AA) are down about in-line with the S&P 500 over the past year. One trader is betting that the company will move far lower in the coming weeks.
That’s based on the November $25 puts. With 59 days until expiration, 8,617 contracts traded compared to a prior open interest of 166, for a 32-fold rise in volume on the trade. The buyer of the puts paid $0.32 to make the bet.
Shares recently traded just over $42, so they would need to shed nearly 40 percent of their value in less than two months for the trade to move in-the-money. And with a 52-week low of just under $40, it would mark a significant downside from here.
However, with a slowing global economy, the share price could fall further in the coming weeks. Alcoa is still coming off a strong year last year, with earnings up 77 percent, a feat unlikely to be repeated this year with the economy weakening.
Action to take: Investors interested in shares can likely get them more cheaply in the next few months. A re-test of the 52-week low looks likely. On a further drop, it may make sense to start buying shares in anticipation of a rebound as the economy recovers. Shares yield just under 1 percent right now, so there’s no rush to get in and get paid to wait.
For traders, the November puts are inexpensive, and can deliver mid-to-high double-digit returns. Traders should look to take quick profits in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.