Alcoa Inc (AA) shares tend to trend either higher or lower into the Alcoa earnings announcement and, while a nice pop usually occurs afterwards, the action after the news can be counterproductive depending on the results.
The company has topped estimates during the past two quarters by $0.05 and $0.02, respectively, but it missed by $0.06 and $0.03 during the two previous quarters.
This makes an earnings trade in the name risky.
Analysts are expecting Alcoa earnings to come in at $0.09 per share on $5.2 billion in revenue next Monday, after the close. The high estimate is at $0.13 on sales of $5.62 billion, while the low estimate has the company earning $0.06 on revenue of $4.88 billion. This could equate to a $0.04 beat or $0.03 miss.
Given the current market volatility, AA stock could move 8% or more.
The technical outlook for the stock is mixed, as shares are battling the 100-day moving average while staying trapped between the 50- and 200-day moving averages. Resistance is at $9.75-$10. Support is at $9.25-$9.
AA Stock Trade Idea
The AA stock July $9 calls (AA160715C00009000, $0.55) and the AA July $9.50 puts (AA160715P00009500, $0.46) purchased together would create a “strangle” option trade with a combined premium of roughly $1, depending on the bid/ask spreads.
These options expire next Friday, in less than two weeks, which is why it would a difficult directional trade to take on either a call or put. The July $9 calls would double if Alcoa shares clear $10, technically, by July 15. The July $9.50 puts would return 100% from current levels if shares fall below $8.50 by the same date.
The strangle trade would start producing a profit if shares clear $10 or fall below $8.50 by July 15. A double would occur if Alcoa shares are above $11 or below $7.50 by next Friday. This would require a move of 15%-20% in the stock to make a 100% return on the strangle trade.
While this trade is tempting, I will likely remain of the sidelines when AA announces earnings.
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