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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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?