On April 23rd, I wrote a blog post on Alcoa (AA) which pointed out the different readings from the daily (showed an uptrend that may have topped out) and weekly (showed stock possible failing at the range top of a long-term channel) charts. I pointed out that the key was for Alcoa to find support at the 50-MA on the daily chart, which it may have done, and break the range top. Note the following daily chart:

(Click on chart to enlarge it)

The stock held the 50-MA and today spiked up on news that Alcoa is looking to sell lackluster units. Alcoa opened on a nice gap up today above the 50-MA and then traded down to fill the gap and back up, piercing the upper Bollinger Band on news. Note that whenever Alcoa broke above the upper band briefly, a pullback occurred soon after, except for the break in mid-January, which was a very slight rupture almost too small to be called a break. It is of course too early to tell if today’s break above the upper band signals another pullback or a new surge in the stock.

Certainly, the metals industry is quite strong, and should not be lightly bet against. Yet for Alcoa’s 2007 uptrend to be considered still in place, we need to see some closes above the $36 level to break the long-term range top and then continued movement upward. It could well pull back from this spike - too early to tell.

Interestingly, implied volatility (IV) and therefore premium has not spiked along with the stock price, because speculators are not jumping on Alcoa. Thus to write the MAY 35 (1.40) or 37.50 ((0.35) Calls would bring in depressingly little time value premium - and June is not much better. The punk amount of time value available, which indicates low IV, indicates that long calls on Alcoa may be a better deal than writing calls. The low IV makes AA a poor buy-write candidate, though even if long the stock those call premiums aren’t much more enticing.

What about those of you already long AA who expect it to pull back again? Writing a price spike like this on a great company that you enjoy owning can be rewarding, because the short calls can be repurchased at a profit if the stock pulls back. But the lack of time value in the Alcoa calls means that all of the profit on a pullback would have to come from the pullback itself, since there is no IV to collapse.

However, only an ITM call will pull back with the stock at anything close to a dollar-for-dollar delta, and the amount of time value in the ITM premiums is so low that you’d better be right about a pullback coming.

This entry was posted on Wednesday, April 25th, 2007 at 1:47 pm and is filed under Covered Calls, Markets/Economy, Technical Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.