Ignore the AA Stock Bears and Trade Calls Ahead of Alcoa Earnings

Advertisement

Aluminum giant Alcoa Inc (AA) will step into the earnings lime on Jan. 12 to release its fourth-quarter report and unofficially kick off the start of another earnings season on Wall Street. While AA stock has had trouble impressing investors in the past, the company has recently posted a string of solid earnings reports, and Monday’s report appears likely to follow in those footsteps.

Alcoa stock upstream AAEarnings expectations have risen during the past several weeks, with the consensus now projecting a profit of 26 cents per share for AA stock — a 525% increase over the same quarter last year.  Revenue, meanwhile, is seen advancing 7.3% to nearly $6 billion.

Despite these elevated expectations, whispers on Wall Street are placing the target higher. Currently, EarningsWhisper.com reports that the fourth-quarter whisper number for Alcoa stands at 27 cents per share.

Overall, the brokerage community is offering up a mixed view of AA stock’s future. Specifically, Thomson/First Call data indicates that eight of the 21 analysts following the stock still rate it a “hold” or worse. Meanwhile, the 12-month consensus price target of $20 represents a modest premium of about 20% to yesterday’s close at $15.46.

In other words, there is room for potential upgrades or price-target increases on AA stock if the company can offer up another earnings beat on Monday.

Turning to the options pits, pessimism is on the rise for AA stock heading into the company’s quarterly report. The January put/call open interest ratio has risen in recent weeks, arriving at its current perch of 0.83.

Peak put open interest resides at the out-of-the-money Jan 12 strike, totaling 66,359 contracts, while peak call open interest of 81,083 contracts resides at the in-the-money Jan 15 strike.1-8-2015 AA
Click to Enlarge

Overall, Jan options are pricing in a potential post-earnings move of about 6.5%. This places the upper bound near $16.50, while the lower bound lies at $14.50.

A post-earnings rally would put AA stock back above its 50-day moving average and place the shares on a collision course with resistance at 17. Meanwhile, a decline would once again breach support at AA’s 200-day trendline, with follow-through selling potentially testing the 14 region for support.

Given the lingering pessimism levied against Alcoa stock and the potential for another solid quarter of earnings, it may be a good play to side with the bulls ahead of earnings. As such, those looking for an options trade on AA stock might want to consider a Feb 15/16 bull call spread.

At the close of trading on Wednesday, this spread was offered at 48 cents, or $48 per pair of contracts. Breakeven rests at $15.48, while a maximum profit of 52 cents, or $52 per pair of contracts, is possible if AA stock closes at or above $16 when Feb options expire.

Traders should also note that a double on this trade can be had (at $15.96) even if AA fails to top the $16 mark, so be sure to set your limit orders accordingly.

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

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/aa-stock-alcoa-inc-ignore-bears-trade-calls-ahead-earnings/.

©2024 InvestorPlace Media, LLC