Call Options Or Put Options On Alcoa (AA)?

| April 9, 2014 | 0 Comments

AA OptionsEarnings season unofficially kicked off this week with Alcoa (AA) reporting after close on Tuesday.  So how did earnings look for the world’s largest aluminum producer?

AA shares are trading at $12.97, up 3.5% today.  The stock’s up 71% from the 52-week low of $7.56 and is just 2% below the 52-week high of $13.18.

Is this an opportunity to buy call options on AA because the company beat earnings expectations?  Or should you buy put options on AA due to lower than expected revenues?

The bulls make a convincing argument…

AA may not be the bellwether it once was, but the company’s earnings are still a good gauge of the global economy.  After all, aluminum demand is a solid indicator of economic growth.

That being said, the company expects aluminum demand growth to hold at 7% in 2014.  That’s a reasonably good sign for the company, especially with how well the AA’s alumina segment has been doing.

Most importantly, the company’s earnings came in at $98 million or $0.09 a share, not including one-time special items.  That’s well above the consensus estimate of $0.05 a share.  It’s also the reason the stock is moving higher as of this writing.

But the bears have a compelling case as well… 

Despite the better than expected earnings, AA’s revenues weren’t as high as predicted.  In fact, revenues came in at roughly $5.4 billion, below the $5.6 billion estimated.  Weak aluminum prices were one of the primary catalysts behind the lower revenues. 

Including all costs, the company posted a huge $178 million loss, or $0.16 a share.  That includes a $276 million charge for restructuring.  It may be a one-time event, but it still required a hefty chunk of change.

AA is also very reliant on aluminum prices.  If the industrial metal should have another down year, revenues and profits could both take a hit.

So are better than expected profits a reason to go bullish on AA, or are lower revenues a bigger reason for concern?

If you think the bulls are right, take a look at buying the AA May $13 calls for around $0.50.

If you think the bears are right, take a look at buying the AA May $13 puts for around $0.50.

Yours in Profit,

Gordon Lewis

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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.