Aluminum giant Alcoa (AA) is facing uncertainty heading into Wednesday’s third-quarter earnings report. While the company has been firing on all cylinders for the past year, aluminum prices have come down sharply from their September peak, reflecting growing concern about demand for the metal and weakness in the global economy.

As such, AA stock traders will want to pay close attention to the Alcoa earnings guidance and any statements made in the quarterly conference call.

For the record, Alcoa earnings for the third quarter are expected to come to 23 cents per share, with revenue seen arriving at $5.85 billion. The company has a solid track record in the earnings confessional, besting Wall Street’s estimates in four of the past eight quarters, matching three times and missing only once during this time frame.

It should come as no surprise, then, that some analysts have set their sights a bit higher. According to EarningsWhisper.com, the whisper number for Alcoa’s third-quarter earnings arrives at 24 cents per share, 2 cents higher than the consensus.

But optimism is doled out sparingly by the rest of the brokerage community.

For instance, data from Thomson/First Call indicates that 10 of the 18 analysts following AA stock rate the shares a “hold” or worse. Meanwhile, the 12-month consensus price target of $16.75 represents a premium of only about 4.75% to Friday’s close at $15.99.

Skepticism is also present among Alcoa stock short sellers. Specifically, the number of AA shares sold short rose to 62.7 million during the most recent reporting period. As a result, some 5.36% of the stock’s total float, or shares available for public trading, are currently sold short.

There are signs that short sellers are not as confident in their short Alcoa bets as they might seem. For instance, calls on AA stock are extremely popular heading into this week’s quarterly report. In fact, the October/November put/call open interest ratio for AA rests at 0.44, indicating that calls (or bets that AA will rise) are more than twice as popular as puts (best that AA will decline) among short-term traders.

The popularity of AA stock calls ahead of earnings could be a sign that short sellers are buying calls to hedge their bets in the event of a continued rally from AA stock. This scenario seems even more likely when you zero in on weekly Oct. 11 options open interest, where the put/call open interest ratio has plunged to a reading of 0.33, with roughly three calls open for every one AA put.

Click to Enlarge Technically speaking, AA stock has been in rally mode for the past year. The shares have nearly doubled along the support of their 10- and 20-week moving averages, with AA topping out just north of $17 in September. The recent selloff was prompted by a decline in spot aluminum prices, but it also has been a boon for Alcoa stock investors, taking shares out of an overbought condition and opening up the field for more buyers to enter.

AA stock is currently perched on support at its 20-week moving average, with additional support just below in the $15 region.

Overall, weekly Oct. 11 AA stock options are pricing in a potential post-earnings move of about 5.3%. This places the upper bound near $16.85, while the lower bound lies just above technical support at $15.15.

Options Trade on AA Stock

Traders looking to position themselves ahead of Alcoa’s quarterly report might want to consider a November bull call spread.

At the close of trading on Friday, the Nov $15/$17 bull call spread was offered at 98 cents, or $$98 per pair of contracts. Breakeven lies at $15.98, while a maximum profit of $1.02, or $102 per pair of contracts, is possible if Alcoa stock closes at or above $17 when November options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.