Buying A Call Option on Alcoa (AA)
Buying A Call Option On Alcoa (AA)
Every quarter, the “official” earnings season kicks off with earnings from Alcoa (AA). Often times, investors look to Alcoa as the tone-setter for the rest of the quarter’s upcoming earnings news.
Alcoa is the world’s largest aluminum producer. The company focuses on standard aluminum products, such as plate, sheet, and foil. In addition, AA produces engineered products, such as castings, fasteners, wheels, and others.
While Alcoa doesn’t hold the sway it used to as a large company, its earnings are still very important to the market. You see, aluminum demand is a good indicator of global economic growth. Investors are always keen to see how much aluminum is being bought around the world.
AA had a strong year, with the shares 61% higher than they were a year ago at this time. At a price of $15.93, the stock is 60% off the 52-week lows and 10% from the 52-week highs.
So is now the time to buy a call option on Alcoa?
As a reminder, a call option makes money when the underlying stock goes up. But AA doesn’t move all that much. So is it worth it?
First off, let’s discuss AA’s fourth quarter earnings. For the complete earnings release, check here.
Basically, AA reported much stronger than expected numbers. Revenues climbed 14% from last year to $6.4 billion. And, net income of $159 million was a significant upgrade from last year’s loss.
Not only has Alcoa been closing unprofitable aluminum smelters, but the company has also been acquiring engineered products companies to increase that side of the business. The company is working on shifting its focus to parts for cars, planes, and heavy machinery.
But here’s the important news…
Alcoa sees continued growth in aluminum demand in 2015. In fact, the company expects 7% growth for aluminum products. Of course, that’s excellent news for the company, which benefited in 2014 from higher aluminum prices.
AA management even expects strong demand from China to continue, which is certainly positive news for American exporters. It seems like the global economic recession may not be as pronounced in 2015 as analysts expect, at least in terms of aluminum.
Let’s take a look at a chart of AA.
As you can see from the chart, despite the strong news from AA, the stock is still trading below its 50-day moving average. Keep in mind, AA’s earnings included a positive forecast for 2015.
As such, this month could be a good time to invest in an AA call option.
What’s more, AA options are nice and cheap because the stock doesn’t tend to be very volatile. In fact, you can purchase March 20th 16 strike calls for just around $0.85.
At $0.85, the call starts making money at $16.85 or higher before March expiration. That’s still easily below the 52-week high of $17.75 and well within reach. At such a cheap price, I believe the March calls are a good buy here.
Yours in Profit,
Gordon Lewis
Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.
Category: Call Or Put Options?
