Alcoa’s Dow Exit Sparks Surge In Options Activity
When a company is usually tossed out of a leading market benchmark index its share price typically softens while that of the replacement company usually gains. Portfolio managers attempting to match the performance of the benchmark are therefore compelled to wave farewell to tried and tested stocks and include the new kid on the block. On September 10, 2013 shares of Alcoa were felt to be unrepresentative of the way America operates these days and was expelled from the Dow Jones Industrial Average making way for Goldman Sachs. Shares in the aluminum maker had acted as an albatross around the neck of the venerable index before the powers that be called it a day.
But what a blessing that turned out to be for Alcoa. Its share price has since vaulted by more than 40% as the global economy shows signs of improvement, drawing increasing investor interest to the name. At the same time the Dow industrials index has only advanced by 4.5%. What we find more interesting, however, is the added interest investors seem to have found in equity options on Alcoa since falling out of the Dow.
Chart ? Option open interest reaches two-year high in Alcoa
In the chart above you can see the boost in total options open interest (yellow line), which in recent days and heading into earnings, reached the most in two years as shares in Alcoa jumped. The dashed white vertical line represents the day Alcoa left the industrials average and you can see the swell in options trading volumes ever since as represented by the orange histogram.
According to our research on investor appetite for option flavor, they appear to have called the move correctly since late November. According to exchange data, using the 20-day moving average reading of call options, bull plays have accounted for 70% of total options volume since Thanksgiving. Total outstanding bull and bear plays reached 1.282 million in mid-January ? pretty impressive in spite of its exclusion from the Dow industrials four months ago.??
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