Today’s tickers: AA, BMC, CECO & XRX

AA – Alcoa, Inc. – Frenzied trading in Alcoa options this morning was driven largely by bullish players piling into calls on the aluminum manufacturer with shares in the name rallying as much as 4.3% to as high as $17.96 in the first half of the session. Rumors that Rio Tinto could make a $25.50 a share bid for the U.S. company spurred speculators to the options market, lifting options implied volatility on the stock 31.2% to 35.53% just before 11:30am. Both Rio Tinto and Alcoa are mum on the subject of takeover talks as of now, but investors are making a lot of noise in options land. Volume in Alcoa’s options has topped 220,000 contracts within the first two hours of trading, with investors heavily favoring call options on the aluminum maker. Traders are exchanging more than 8.4 contracts on Alcoa for each single put option in action this morning. Trading traffic is heaviest in the front month where investors are picking up out-of-the-money calls at every available strike price. May $18 strike calls are most active, followed by the May $20 strike calls. Call volume in the May $20 strike calls is currently pushing 30,000 contracts, which is more than two times the number of calls represented in open interest at that strike. Most of the call options were purchased for an average premium of $0.12 apiece, implying an average breakeven price for buyers at $20.12 through May expiration. Continued speculation regarding a potential takeover, or confirmation of such rumors for that matter, would no doubt send premium on the May $20 strike calls higher still. Optimism spread to the June contract calls where buyers of the options are leading the feeding frenzy. Investors traded more than 15,800 call options at the June $21 strike on nearly nonexistent open interest of 241 contracts. Buyers of these calls paid just $0.10 this morning, but the huge spike in implied volatility in conjunction with the rally in AA shares, has those same contracts trading for twice as much, or around $0.22 cents a-pop as of 11:30am in New York. Of course, call buyers who choose to hold onto these contracts for some length of time will see the value of their positions collapse along with implied volatility if the rumors turn out to be baseless.

BMC – BMC Software, Inc. – Fourth-quarter results from BMC Software, Inc. are scheduled to hit the air waves after the market closes on Wednesday evening, and it looks like one investor is gearing up for a post-earnings rally in the price of the underlying stock to its highest since the turn of the millennium. Shares in BMC are currently down 0.65% to arrive at $49.62 as of 12:30pm. The Houston, TX-based software vendor popped up on our scanners after a sizable bull call spread traded in the front month. The strategist responsible for the transaction appears to have purchased 10,000 calls at the May $52.5 strike, and sold the same number of calls at the higher May $55 strike, all for net premium of $0.45 per contract. If the trader’s expectations are not met, and shares fail to rise post-earnings or at any point ahead of May expiration, the investor will lose the entire amount of premium paid to enact the spread. However, the call-spreader makes money in the event that the software company’s shares surge 6.7% over the current price of $49.62 to exceed the effective breakeven price of $52.95 at expiration. Maximum potential profits of $2.05 per contract pad the investor’s wallet if shares in BMC Software jump 10.8% in the next few weeks to trade above $55.00 by expiration day. The company’s shares have not traded above $55.00 in the past decade.

CECO – Career Education Corp. – A few pre-earnings call buyers showed up at Career Education Corp. this morning to position for a rally in the price of the underlying stock. Shares in the for-profit education company increased as much as 2.7% this morning to secure an intraday high of $22.48. CECO reports first-quarter earnings after the closing bell on Wednesday. Career Education Corp. is up 27.4% off its 52-week low of $16.36 set back on October 14, 2010, but the stock nearly hit $25.00 at the beginning of April. Call buyers in the front month are well-positioned to benefit should a post-earnings rebound in CECO’s shares occur ahead of expiration. It looks like investors picked up around 1,100 in-the-money calls at the May $22 strike for an average premium of $1.11 a-pop. Bulls paid more notice to the higher May $23 strike where more than 3,400 call options changed hands on open interest of 559 contracts. It looks like most of the calls were purchased for an average premium of $0.50 each. Call buyers at this strike profit if shares in Career Education rally another 4.5% over today’s high of $22.48 to surpass the average breakeven price of $23.50 by expiration day later this month. The rise in demand for options ahead of earnings lifted CECO’s overall reading of options implied volatility 11.2% to 48.41% as of 11:50am.

XRX – Xerox Corp. – Fresh positioning in Xerox Corp. call options today suggests some strategists expect to see shares in the office equipment maker rise in the near term. Shares in XRX are currently up 0.70% to stand at $10.18 as of 12:05pm in New York trade. Some 3,000 calls were purchased at the May $11 strike for 4 pennies per contract, although open interest at this strike is sufficient to cover volume generated at that strike this morning. June contract calls are far more active today, with in-the-money call buyers scooping up around 1,525 contracts at the $10 strike for an average premium of $0.55 each. Investors long the June $10 strike calls make money if shares in Xerox rally another 3.6% to trade above the average breakeven price of $10.55 by June expiration. Volume is heaviest at the higher June $11 strike where some 8,980 calls changed hands on previously existing open interest of just 635 contracts. Options traders purchased most of these calls for an average premium of $0.13 apiece. Call buyers at this strike make money in the event that shares in XRX surge 9.3% to exceed $11.13 by expiration day next month. Finally, bullish players purchased around 1,400 call options up at the June $12 strike for an average premium of $0.04 per contract. The rise in demand for call options on Xerox Corp. helped lift options implied volatility on the stock 9.9% to 28.53% this afternoon.

Andrew Wilkinson

Senior Market Analyst

Caitlin Duffy

Equity Options Analyst