Call Options Or Put Options On Alcoa (AA)?

| January 10, 2014 | 0 Comments

AA OptionsAlcoa (AA) just released earnings yesterday as fourth quarter earnings season is now officially underway.  Alcoa is the world’s largest aluminum producer.

AA shares are trading at $10.69, not taking into account afterhours action.  The stock’s up 41% from the 52-week low of $7.58 and is just 2% below the 52-week high of $10.88. 

Is this an opportunity to buy call options on AA because of higher projected aluminum demand in 2014?  Or should you buy put options on AA because the company’s fourth quarter earnings were worse than expected?

The bulls make a convincing argument…

AA may have missed expectations with its earnings report, but the aluminum industry continues to show stronger demand.

First off, AA’s revenue came in at $5.6 billion – higher than the $5.4 billion expected by analysts.  The company beat revenue expectations despite struggling with low aluminum prices.  That implies demand is strong.

The company believes aluminum demand will grow by 7% this year.  Coupled with a better economy, aluminum prices should increase.  As such, higher aluminum prices and greater demand should boost AA’s financials in the months ahead.

But the bears have a compelling case as well… 

AA had several pieces of bad news in its earnings report.  The company lost $2.3 billion during the quarter, mostly due to the write down of aluminum-smelting operations. 

However, even if you take out the non-recurring losses, the company still earned just 4 cents per share.  That’s lower than the 6 cents per share projected by analysts.

What’s more, the company pleaded guilty to an affiliate bribing officials in the Middle East.  The company has to pay $384 million in penalties and will be under tighter scrutiny by officials.

So is AA’s stock going higher due to growing aluminum demand, or are the worse than expected fourth quarter results a reason to take a bearish position?

If you think the bulls are right, take a look at buying the AA February $10 calls for around $0.50.

If you think the bears are right, take a look at buying the AA February $10 puts for around $0.50.

Yours in Profit,

Gordon Lewis

Tags: , , ,

Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.