EVENT: AA(~$18.00) reports Q1 earnings tonight after the close.
-Options market is implying about a 6% move which is fairly rich to its average move over the last 4 qtrs at 2.35% and its 3.4% average move over 8qtrs.
PRICE ACTION / SENTIMENT:
-stock is up ~16.5% ytd and up 80% since Sept 1, 2010, vs the ~27% return in the S&P 500 in that same period.
-wall street analysts seem to be fairly mixed on the name with 9 buys, 6 holds and 2 sells with an average 12 month price target of ~$20.
-of the top 10 holders who account for ~28% of the shares in the entire float, only 2 in the last 13f filing actually sold any and 7 of the 10 added to existing positions.
TECHNICALS:
While the 80% rally in 7 months appears to be a bit overdone in the near-term, when you consider the run other commodity related names, and actual commodities, it doesn’t exactly stick out like a sore thumb. Longer term chart shows a tremendous amount of room overhead and a breakout above these multi-year highs could see a low 20s stock in the offing.
MY VIEW:
-The stock is clearly benefiting from the higher prices that aluminum is fetching these days, but I am not certain that the recent ~10% rally in aluminum is likely to offset rapidly rising input costs and the affects of the weak dollar.
-Near-term the stock looks overbought and will need a beat and raise quarter and guidance to get this thing to even attempt a breach of $20. The above listed headwinds could keep a lid on the stock near term.
1 WAY TO PLAY:
TRADE:
AA (stock ref ~18.00) Buy the July 17 / 14 1×2 Put Spread for ~.50
-Buy 1 July 17 put for ~.80 and
-Sell 2 Apr 14 Puts for a total of .30 (.15 each)
Break-Evens on July Expiration:
Upside –If the stock is above 17 than you lose the .50 (or ~3% of the underlying).
Downside: if the stock is btwn 17 and 16.50 you can lose up to .50. if the stock is btwn 16.50 (down ~8%) and 14 (down ~22%) can make up to 2.50 (or ~14% of the underlying)….
BEST CASE-stock is 14 and you make 2.50. bwtn 14 and 11.50 pay off trails off,
WORST CASE-stock below 11.00 (down 39%) and you lose money…..You are essentially put the stock at 14, but you have 3.00 in gains from the July 17 Put you are long, less the .50 premium that you paid……so loses really start at 11.50…..It is VERY unlikely that the stock will be down 39% by July expiration.
TRADE RATIONALE: I want to Look to JULY expiration as it will capture 2 earnings events, and identify a structure that gives me short exposure while minimizing my premium outlay. Another way to do this would be too leg into this trade, BUY the July 17/14 Put Spread as if 1 up and if the stock starts heading south after earnings look to sell another of the 14s to lock in some gains……I am using strikes and break-evens that are at what I deem to be significant support levels that also offer considerable profit potential without offering to much added risk.