Hey trader,
Two metal stocks showed big call buying on the Console this morning. Alcoa had it, and so did CLF.
Call buying basically means someone’s betting a stock goes higher. Both looked like trades worth following.
I took only one of them.
CLF had a huge pile of call contracts sitting at $13, right where it was trading. I call a strike like that a wall. Alcoa had very little in its way up to $50.
Checking what sits above a print can keep you from following call buying into a stock with no room to run.
The Alcoa print started me down this road, so I’ll begin there.
How Alcoa’s Call Buying Handed Me a Target
Alcoa’s call buying came in on the November 20 expiration at two strikes, $45 and $50. Each print topped 1,000 contracts.
The 5,000 contracts at $45 traded for $2.15. That’s closer to the ask than the bid, which tells me they were bought.
Later, the buyer closed 3,000 of those calls and rolled them up to the $50 strike.
A roll basically means closing one option and opening another at a different strike or date. You don’t often see one happen intraday.
Open interest at $45 confirmed it. Open interest is simply the number of contracts still on the books, and it came in under 5,000. That leaves 2,000 contracts still sitting at $45.
I don’t read this as a hedge. Somebody has a trade on, and $50 becomes my target.
The 10:14 print showed up on the chart too. Volume picked up and the price moved higher.
I want to see that with call buying. The dealer who sold those calls hedged right away, and that hedging added upward pressure.
Why CLF’s Call Buying Didn’t Make the Cut
CLF had call buying of its own. One print bought 5,500 contracts at 10:47 this morning.
That call buying didn’t move the price.
I still think somebody has a trade on. The buying sits out at the $14 strike in January, and that’s far enough out that I doubt it’s a hedge.
Next week’s expiration carries about 15,000 contracts at $13. I think most of those calls were sold.
Sold calls put dealers in positive gamma at that strike. Essentially, they sell into strength and buy into weakness. Every push toward $13 runs into a seller.
I checked whether that wall was likely real. A GEX chart, short for gamma exposure, maps where dealer hedging can slow price down or speed it up.
It assumes institutions sell calls and buy puts. That doesn’t always hold on a single stock.
On CLF, call volatility dropped as I moved further out of the money, while put volatility climbed with every strike. That tells me they’re probably selling calls and buying puts.
CLF’s trend actually looked a little better than Alcoa’s. With that much resistance at $13, it didn’t look like a trade today.
What Alcoa Had Going for It
Alcoa showed similar call buying with a much cleaner chart, especially north of $44 to $45. Up to $50, the overhead just isn’t heavy.
Alcoa passed the same volatility check. The read was more muddled than it would be on SPY.
The November expiration has very little open interest that should stifle the price. The one heavier level sits at $45, with about 3,000 put contracts.
Those puts are in the money, meaning their strike sits above the stock price. I assume they were bought.
If Alcoa breaks $45, those puts move out of the money. Dealer hedging then adds upward pressure.
Short interest is only 4.5%, with a short ratio of 3.5 days. I don’t expect much of a short squeeze.
A gamma squeeze at $45 and $50 is possible, though. Basically, dealers have to buy more stock to stay hedged as the price climbs.
Earnings land on October 15. Alcoa has put together a run ahead of earnings before, and it could do it again.
How I’m Trading Alcoa’s Call Buying
Alcoa was trading at $43.50. Buying the stock, I’d risk about $3 off the low to make about $6.50.
I went with a call vertical instead. That means buying one call and selling a higher call against it, which caps both what I pay and what I can make.
My first look was the 44/46 vertical at 51 cents. I wanted 40 cents or less, so I moved both strikes up 50 cents.
Here’s the setup I shared:
- Setup: Buy the 44.50 call and sell the 46.50 call in a short-dated expiration.
- Cost: $0.38.
- Target: $1.50 on the spread. I’d like to see Alcoa at $46.50, and I think the path is there in the next couple of days.
- Adjustment: If Alcoa moves in the money and stalls, I’ll roll the 44.50 up to 45 or 45.50 to take risk out. If it falls back to $40, I’ve got one shot at rolling down.
- Edge: Alcoa has thin overhead up to $50. Someone just rolled calls to that strike, and the $45 puts can add pressure if they flip.
If any sort of squeeze pushes Alcoa to $50 this week, I’m more than home free.
Next time you spot big call buying, check what’s sitting above the print before you follow it. The same call buying made a trade in Alcoa and a pass in CLF.
Brandon Chapman, CMT
Creator of Ghost Prints
