Option Trade on Alcoa (AA) – Naked Puts

Jim Cramer is ranting about Dow stocks this week. I think he’s on to something with Alcoa Inc (NYSE: AA). While trading at 39.41, I sold 3 OTM puts on AA at the July 37.50 strike for 1.35. I received $392.75 after commissions. I considered selling ITM puts at the 40 strike for 2.40, but quickly decided the risk wasn’t worth the reward. I have a much higher likelyhood of the 37.50 option finishing OTM and I see no reason to be greedy here.

Looking at the p/e for AA I see that it’s historically low right now. AA still has had yoy quarterly revenue growth of 11% and has a p/e of 12.6. I think that multiple should be higher. Schaeffersresearch.com rates AA 7 out of 10. On the other hand, earnings growth has shown deceleration and that can be a big negative if that trend continues and even with a higher multiple, the “e” part of p/e might make up the difference. I can only assume that’s the reason it’s sitting low in the historical p/e range. Throw in the speculation that AA could be bought out and I see strong support above my strike.

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2 Comments

Comment by Kadena

AA is good bet. It was my FIRST EVER STOCK Buy back in Oct ‘05, in low 20’s i think. Didn’t know much then, just that the company was around since I was a little boy, was big, and the charts showed it at what looked like huge dip from normal trading. Rough figures $12,000 (at 40) producing 400 in 2 months is about 2,400 a year, and that is over 20% at 37.5. I like those returns, and even more when, as you describe, looks almost automatic. I wonder what Jim’s plays are right now?
Pingback by Alcoa (AA) Update

[...] I read a good article on Yahoo! today that reinforced my Alcoa (AA) naked put selling and my post that went with it on 5/22. So far, it seems I made the right move, but I don’t see AA as the best place to sell new naked puts for now. This Yahoo! article makes a good point about the take over deal likely to not materialize. Looking at the chart you can see that AA is at the top of its upwardly trending trading channel now and is likely due for a pull back a little. I don’t see it coming back enough to give me trouble on my three July 37.50 naked puts. [...]

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