Alcoa (AA) is scheduled to announce earnings July 8, and shares could make a big move depending on how Wall Street reacts. The company used to kick-start earnings season, but AA stock carries less significance now after being booted from the Dow Jones Industrial Average. However, I still like to watch its results come in.
Alcoa has been on a roll over the past year, topping Wall Street’s forecasts by 2 cents, 5 cents, 8 cents and 6 cents, respectively, in each of the past four quarters. However, AA shares dipped to a 52-week low of $10.94 on Wednesday.
Current estimates have AA stock earning 23 cents a share on revenue of $5.8 billion. With steel stocks hitting fresh 52-week lows and commodity prices still languishing, Alcoa could come up short this time around.
The chart below shows all of the major moving averages curling lower, with the next major support level at $10 and the 2013 highs. Shares peaked at $17.68 late last year, and a 10% drubbing would complete the round-trip return. This week’s move below $11 and the 200-day moving average could be an omen of things to come next week.
The July option chain can be used to play a potential move past $12 or a drop below $10 for AA stock. Although there are weekly options to trade on AA, I looked at the regular July options for both bullish and bearish trades.
The AA Jul $11.50 calls for 15 cents can be used to play a bullish rebound to or past $12. The breakeven point for the trade would be $11.65, so the risk/reward would be compelling if shares do trip $12. If that turns out to be the case, the AA Jul $11.50 calls would be 50 cents in the money and the return would be 233%.
If shares of Alcoa stock stay below $11.65, the trade would lose money. If shares stay under $11.50 by July 17, the options would expire worthless.
To offset some of the risk, traders could also add the AA stock Jul 11 puts priced at 32 cents to create a strangle option trade. Bearish traders could play these put options if they believe that the company will miss earnings estimates or lower guidance and possibly test single digits.
If shares fall below $10.25, the AA Jul $11 put options will also be 75 cents in the money, which would represent a 134% return from current levels. To offset the cost of the AA Jul $11.50 calls, if used as a strangle option trade with the AA Jul $11 puts, shares will need to fall below $10.50 to break even.
If shares do test $10, the AA Jul $11 puts will be $1 in the money and the strangle option trade would double to offset the cost of 45-50 cents for both options.
I normally shy away from earnings trades, especially with options that expire in less than two weeks. The August option chain for AA stock would allow more time for the trade to play out, and I may analyze it over the three-day weekend.
The AA Aug $11 puts priced at 53 cents would also be $1 in the money if shares test $10 by mid-August. While this is the trade I like best at the moment, I have not decided to take any positions yet.
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