Call Options Or Put Options On Alcoa (AA)?

| November 25, 2013 | 0 Comments

AluminiumAluminum giant Alcoa (AA) is making news this week.  The former Dow Jones Industrial Average member is typically considered the largest aluminum producer in the world.

AA shares are trading at $9.24 and are up 8% for the year.  The stock’s up 22% from the 52-week low of $7.58 and 7% below the 52-week high of $9.94.

Is this an opportunity to buy call options on AA because Goldman Sachs (GS) just upgraded the company to Buy?  Or should you buy put options on AA because of the company’s heavy reliance on commodity prices?

The bulls make a convincing argument…

AA was just upgraded by Goldman Sachs from Neutral to Buy.  Goldman set a price target for $11, which is a fair clip higher than the $8-$9 range the stock has been trading in for most of the year.

The upgrade was due to the company’s growth in higher margin aluminum products and lower cost structure.  Needless to say, higher margins and lower costs should lead to higher overall profits.

With the influence Goldman has, investors could become very bullish on AA with the upgrade.

But the bears have a compelling case as well… 

Despite Alcoa’s long track record of success, the company is in a difficult industry.  Industrial metals are heavily influenced by the performance of the global economy.

As the economy improves, industrial metals are in greater demand, and the price of aluminum typically rises (along with other metals).  As such, AA’s profits are closely tied to the price of aluminum.

However, there’s nothing AA can do about commodity prices.  They’re impacted by supply and demand across the globe.  If the economy turns south, AA could be in trouble. 

So is AA’s upgrade a reason to be bullish on the stock, or are the drawbacks of being tied to commodity prices a reason to take a bearish outlook?

If you think the bulls are right, take a look at buying the AA January $10 calls for around $0.30.

If you think the bears are right, take a look at buying the AA January $9 puts for around $0.20.

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.