Option Trade
Alcoa Inc (NYSE:AA) Puts 
Tuesday, July 07, 2015

**OPTION TRADE: Buy the AA Aug 2015 11.000 put (AA150821P00011000) at or under $0.50. Place a protective stop loss at $0.20, and a pre-determined sell at $1.00.

by Ian Harvey

July 07, 2015


Alcoa Inc (NYSE: AA), engaged in lightweight metals engineering and manufacturing, will officially kick off the earnings season when it reports its second-quarter numbers after the market close on July 8. Analysts forecast Q2 earnings of $0.23 per share, up from $0.18 during the same period last year. AA shares have lost 29.8% on the year.

Alcoa does not have the same weight as it once did on Wall Street, as it was once viewed as the ultimate bellwether stock. However, Alcoa's results still offer some clues as to what to expect from the earnings season since aluminum is used is such a variety of sectors. As a result, analysts pay a lot of attention to the company's quarterly results. Alcoa has been working hard to cut costs, but the company still faces some pretty challenging obstacles.

The strong dollar is also weighing on the company, as it has a material amount of international business. Depressed metal prices will weigh on the stock moving forward, and while the major aluminum companies have been cutting back on production in order to give prices a boost, prices have not risen enough to give Alcoa the boost it needs to make back some of its recent losses.

Also, the chart work reveals that AA has a clear bias to the downside. Alcoa’s two-year chart shows there is risk for a drop to $10 to $9 on continued closes below $11 and the 200-day moving average. Resistance is at $11.75-$12.

Technical Details

Shares of Alcoa closed at 11.03 on Monday. Alcoa has a 1-year low of $10.92 and a 1-year high of $17.75.

The stock’s 50-day moving average is $12.16 and its 200-day moving average is $13.96.

The company has a market cap of $13.48 billion and a price-to-earnings ratio of 22.42.

The stock price of Alcoa Inc. nosedived 32.6% over the last 200 days, and is in strong down trend. In the last 50 and 100 days, Alcoa Inc. is down 15.49% and down 30.88%, respectively.


Previous Earnings

Alcoa last announced its earnings results on Wednesday, April 8th. The company reported $0.28 earnings per share for the quarter, beating the analysts’ consensus estimate of $0.26 by $0.02. The company had revenue of $5.82 billion for the quarter.

During the same quarter last year, the company posted $0.09 earnings per share. Alcoa’s revenue was up 6.7% compared to the same quarter last year. On average, analysts predict that Alcoa will post $0.94 earnings per share for the current fiscal year.

Future Earnings

Alcoa will announce its second quarter 2015 earnings results on Wednesday, July 9 after market close. Analysts expect the company to post earnings of $0.23 a share and $5.79 billion on revenue, up from $0.18 earnings per share but down from $5.84 billion in revenue from the same quarter a year prior.

However, whispers are swirling that Alcoa will miss earnings targets, with EarningsWhisper.com reporting a whisper number of just 21 cents.

It is worth noting the analyst EPS estimate for Alcoa has fallen from $0.26 over the past 60 days, however Wall Street has a history of underestimating the company’s EPS over the past four consecutive quarters.

Why Alcoa?

Bearish sentiment has begun to take hold in the analyst community for AA stock. The last several moves within the community have been downgrades, resulting in ten “hold” or worse ratings and 12 “buys,” according to data from Thomson/First Call. Meanwhile, the 12-month price target currently rests at $16 per share.

Pessimism is also swelling among short sellers. Specifically, the number of AA shares sold short surged by 23% in the most recent reporting period. As a result, some 72.5 million shares of AA stock, or nearly 6% of the stock’s total float, are now sold short.

In early April Alcoa predicted global aluminum demand would grow 6.5% this year, down from 9% growth in 2014.

To meet these challenges, Alcoa has been trimming high-cost commodity operations, selling off lower-value assets, and focusing on low-cost production facilities to more closely match shifting marketplace demand for light metals. This comes at a cost, however. The company warned earlier last week it will book a one-time charge of 8 to 9 cents a share against its second-quarter earnings to cover expenses tied to shutting down its Pocos de Caldas aluminum smelter in Brazil.

As for the dollar dilemma, Barclays Capital analyst Jonathan Glionna wrote last week “Given the strength of the dollar, we believe the translation adjustment required in 2Q15 could be the largest ever.”

As for the fundamentals of Alcoa’s stock performance, Sterne Agee CRT analyst Josh Sullivan, in a note released last week, painted a bleak near-term picture for the aluminum industry and cut his target share price on Alcoa to $12 from $17 on concerns its stock might be fully valued. Alcoa shares promptly fell even further. On Wednesday they hit a 52-week intraday low of $10.94 a share.

After a stellar 49% advance in 2014, Alcoa’s share price got hammered. It’s down 30% since Jan. 1 and down 25% from where it was trading a year ago. That’s a poor showing when compared with a 5.3% rise in the S&P 500 index SPX over the past 12 months.

Analysts don’t expect much support from the underlying commodities market. Typical is a June 29 research note from J.P. Morgan Metals and Mining Analyst Michael Gambardella, in which he cut his full-year earnings estimate for Alcoa to 83 cents a share from 93 cents, citing lower 2015 aluminum price forecasts (down to 81 cents a pound from 84 cents previously) and lower than expected realized premiums in the second quarter.

Analysts Opinions

Alcoa had its price target decreased by Macquarie from $13.00 to $12.00 in a research report sent to investors last Thursday morning. The firm currently has a neutral rating on the stock.

Also, Alcoa has been given a “BB+” credit rating by analysts at Morningstar. The firm’s “BB+” rating suggests that the company is an above-average default risk. They also gave their stock a five star rating.

The company has also been the subject of a number of other research reports:-

• Analysts at TheStreet reiterated a “hold” rating on shares of Alcoa in a research note on Thursday, July 2nd.

• Analysts at Sterne Agee CRT reiterated a “neutral” rating and set a $12.00 price target on shares of Alcoa in a research note on Thursday, July 2nd.

• Analysts at Deutsche Bank lowered their price target on shares of Alcoa from $19.00 to $16.00 and set a “buy” rating on the stock in a research note on Thursday, July 2nd.

• Finally, analysts at Stifel Nicolaus reiterated a “buy” rating and set an $18.00 price target (down previously from $19.00) on shares of Alcoa in a research note on Monday, June 29th.

Ten equities research analysts have rated the stock with a hold rating, eleven have assigned a buy rating and one has given a strong buy rating to the stock. The company has a consensus rating of “Buy” and a consensus price target of $16.00.


The aluminum giant has been pressured this year by a strong U.S. dollar and slowing demand, forcing the company to trim high cost operations, sell low value assets, and focus on lower-cost production.

As for recent results, FactSet data show Alcoa topped analysts’ per-share earnings expectations in each of its past four quarterly reports. That didn’t always help the share price, however. Alcoa’s share price dropped immediately after release of the company’s last three quarterly results, reflecting primarily disappointment with revenue, management’s market outlook, or both.

Therefore, based on the facts above the following option trade is recommended…..

**OPTION TRADE: Buy the AA Aug 2015 11.000 put (AA150821P00011000) at or under $0.50. Place a protective stop loss at $0.20, and a pre-determined sell at $1.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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