Another earnings season is about to kick off on Wall Street, and aluminum giant Alcoa Inc (AA) will step onto the earnings stage after the close of trading on Monday. Metals and commodities have been beaten down in 2016, and Alcoa stock has paid the price.
That said, the worst appears to be already priced in, creating an opportunity for AA stock options traders.
Diving into the numbers, Wall Street is looking for earnings to plummet from 28 cents per share last year to just three cents per share this year. Furthermore, revenue is seen falling 11.8% to $5.13 billion year-over-year.
Sentiment within the brokerage community is very nonplussed. The whisper number falls in line with the consensus estimate, while 10 of the 18 analysts following Alcoa stock rate the shares a “hold” or worse according to data from Thomson/First Call. Additionally, the 12-month consensus price target of $10.61 a very modest 11.9% premium to the stock’s Thursday close.
Options traders are leaning bearish on Alcoa stock heading into Monday’s report. Currently, the April/May put/call open interest ratio for AA rests at 1.05, with puts outnumbering calls among near-term options. This ratio rises slightly to 1.00 for the April series, which expires at the end of next week.
Click to Enlarge Overall, April implieds are pricing in a potential post-earnings move of about 7.8% for Alcoa stock. This places the upper bound near $10.21, while the lower bound lies at $8.75.
Alcoa stock is currently being squeezed between support at its 200-day moving average and resistance near $10. Additionally, the stock’s 50-day moving average is headed toward a bullish cross of its 200-day counterpart. A breakout above $10 could be the buy signal AA bulls are looking for, but only if Alcoa can offer up positive guidance.
2 Trades for AA Stock
Call Spread: With most of the company’s woes already priced into Alcoa stock, and the shares pulling back to support heading into next week’s quarterly report, there is real potential for a bullish post-earnings reaction. With a wealth of bearish sentiment levied against Alcoa stock, there is ample sideline money to push the shares higher, creating an opportunity for traders willing to take a risk.
Along those lines, the April $9.50/$10 bull call spread has plenty of potential. At last check, this spread was offered at 23 cents, or $23 per pair of contracts. Breakeven lies at $9.73, while a maximum profit of 27 cents, or $27 per pair of contracts, is possible if Alcoa stock closes at or above $10 when April options expire.
Put Spread: Metals prices and global demand remain a significant concern for Alcoa guidance, however. If the company’s outlook is poor, you can expect Alcoa stock to head lower once again. Traders siding with the bears might want to consider an April $9/$9.50 bear put spread.
At last check, this spread was offered at 19 cents, or $19 per pair of contracts. Breakeven lies at $9.31, while a maximum profit of 31 cents, or $31 per pair of contracts, is possible if Alcoa stock closes at or below $9 when April options expire at the end of next week.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
