Alcoa Inc.: Play with a Straddle Before Q1 Earnings

Alcoa Inc. (NYSE:AA) has my attention because it will unofficially open the first quarter earnings season after the closing bell today. Alcoa with its market capitalization of $16.33B is engaged in lightweight metals engineering and manufacturing. The Company’s products, which include aluminum, titanium and nickel, are used in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics and industrial applications.

It also produces and manages primary aluminum, fabricated aluminum and alumina combined, through its active participation in the aspects of the industry including technology, mining, refining, smelting, fabricating, and recycling.

Trading Insight on Alcoa

As I have mentioned earlier, Alcoa will open the earnings season and the bulls and bears are already taking strategic positions in order to record profits when the earnings are released. The consensus analyst estimate is that Alcoa will report earnings of $0.25 per share for the first quarter. However, an earnings beat or miss doesn’t seem to have much influence on how the shares of Alcoa trades after its earnings release.

Alcoa surprised positively to beat estimates in 9 out of the last 10 quarters. In fact, the stock recorded a positive surprise of 26.92% and 47.62% in the last two quarters and it reported an average positive surprise of 48.25% in the last four quarters.  However, the stock recorded losses in the trading sessions after its last two earnings release despite the positive results. In fact, the shares of Alcoa dipped almost 10% in the weeks following the positive surprises of the last two quarters.

How to Trade AA Options

Alcoa Chart

The chart above shows how the shares of Alcoa have traded within the last one year. You will observe that the stock started around its 52-week low of $13.42 and it soared to form a channel around its 52-week high of $17.75 before it came crashing towards that $13 price level again. Interestingly, Alcoa seems to be back in the channel with the $13 support and $13.5 resistance points from which it started its ascent about one year ago; hence, we can expect the stock to break out into new levels in fiscal 2015.

However, given the performance of Alcoa’s stock after the last two earnings release, it is obvious that it doesn’t make much sense to buy Alcoa call or put options in the hopes that the stock will trade in a given direction after its earnings release.

Nonetheless, if we can’t buy or sell straight call and puts, we can still make profit on Alcoa options by trading AA with a straddle. The straddle involves buying the call and put options of a stock at the same strike price and at the same expiration date.

You might want to consider buying the AA Jun 2015 13.000 call (AA150619C00013000) at an asking price of $1.00 and the AA Jun 2015 13.000 put (AA150619P00013000) at an asking price of $0.58. The call options will cost you $100, the put options will cost you $58 for a contract each, and you’ll spend $158 for the straddle.

When Alcoa releases it first quarter earnings after the closing bell today, the stock will either rise to breakout above the $13.50 resistance point or fall to break down below the $13 support level in the coming days and weeks. Irrespective of how Alcoa trades, we can expect to profit it the stock rises above $14.50 or if it falls below $12.42.

 

 

— Daily Option Alerts

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