Friday, January 8, 2010

New bearish trade in AA into Earnings

Alcoa kicks off earnings season on Monday and has in the past few weeks made a run from about $12.75 to a recent 52wk high of $17.06, a staggering 32% gain (See chart below). I know there has been a lot of good news in the sector, but I think that investors are getting a little ahead of themselves. So I bought 10 Jan '10 puts at the $16 strike for $0.24. I actually got the idea from a trade idea posted by Onn.tv, only I am taking the opposite stance. To see the trade alert that went out click this link -->
http://www.onn.tv/articles/practical-options-trader/trading-alcoa-nyse-aa-earnings/




I know that expiration is next Friday, and that the decay on this will be exponential after earnings if nothing big happens. But it is a gamble that I am willing to take. I think that AA has the potential to fall back to at least $15. Lets look at the risk profile:



As you can see by the probabilities above. The options market is pricing in that AA has a 100% chance of finishing between $15 and $16.95 where it is currently trading. If it does nothing on Monday I lose about $100 bucks. If it trades down to $15 I make about $880, and if it shoots to $18 I lose $204 (almost all of the premium paid).


So lets see what Monday brings.



7 comments:

  1. Sometimes it is fun to play the contrarian.

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  2. AA beats on Rev's $5.4B vs $4.82B, misses big on EPS $0.01 vs $0.06. Halter during afterhours. Will be interesting to see what happens. Is the topline growth going to be enough to prop this name up? I guess it will all depend on what they say going foward.

    Either way I will be closing out my long puts tomorrow hopefully for a gain but could be a loss as I do not know how the market will take this report. I am just looking for the classic pump and dump. Pump it up till earnings release and let it fall like a house of cards.

    We will just have to wait and see.

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  3. I'm actually interested to know how they beat top line but missed so bad on EPS. The knock on stocks in general was that they were beating estimates the last two quarters based on bottom line reductions that can't be sustained over the long run as they got about as lean as they could get. Nobody foresaw organic top line growth so in general this should be more optimistic for the general market. I doubt I'll follow up so let me know what the reasoning was for beating top line but missing EPS. Thanks.

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  4. So I checked in after I got back to lunch. When trading resumed in the after-markets AA traded down $1.2 to touch $16.25 and is currently trading down .89 to trade at $16.56.

    I hope that this continues tomorrow so I can book some profits.

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  5. In hindsight I am thinking I probably should had purchased the $17.5 strike Puts which were going for about $0.70 more. But then again I was trying to reduce risk on the gamble. I still think I will make money I am just not sure how much yet. Currently at $16.08 pre-market. Has traded as low as $16.02. I really think there is a good chance for it to break the $16 level. If it can really get pounded an breaks the $16 level with volume there is a potential moved down to $15.50 and possibly all the way down to fill the gap on 12/18/09 to $14.50.

    I think I am going to have to watch this one closely because it could trade down fast and then bounce.

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  6. Watched for the first 10 minutes and saw that there were buyers ready to buy around $15.85 on the tape. Did not make as much as I had hoped but nonetheless I made about $103. If I would had bought the Feb '10 I would had made about double this. If I would had bought the $17.50 puts with Jan '10 expiry I would be up $630.

    So like I said before in hindsight I should had purchased the $17.5 puts. Oh well, I still made money.

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  7. Looks like I was early as usual. AA traded within $0.02 of my first target below $16. Good for a double now.

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