Alcoa (NYSE: AA) is among the top three aluminum producers of the world, engaging in bauxite mining, refining, smelting, energy production, and the manufacturing and sales of primary aluminum and processed nickel, titanium, and alumina products. The shares of the company had been hit hard by the decline in commodity prices, cheap imports from China in its primary product ranges, and a decline in global demand for industrial materials. The negative trends and the volatility are likely to continue into next year, providing great trading opportunities using put options.
Alcoa carries a high debt load and its production costs are higher compared to its competitors, which makes the firm more vulnerable to the cheap products flooding the US market. The company is trying to reposition itself by concentrating on next-generation alloys and superalloys for the automotive and aerospace industries. Ford (NYSE: F), Boeing (NYSE: BA) are among the clients buying these new types of sheets and other parts but these sales are relatively small compared to the traditional products the company markets.
Alcoa is preparing for a strategic split-up next year into a separate mining and manufacturing firm, in order to achieve better funding conditions for the manufacturing part as the mining business is struggling. Although some investors see this as a positive process, repackaging Alcoa won’t solve the problem of being a relatively inefficient company. And with the split itself being an expensive (up to $300 million in cost) endeavor it could even make matters worse.
The technicals look negative as AA fell almost 60% year to date as aluminum and steel prices collapsed. Since hitting $7.9 in August, down from $18 in last November, the stock consolidated in a volatile manner with a rally up to the $11 level and a retest of the lows this month. I expect new lows early next year as after the current short-term bounce ends, probably touching the 200-day MA currently, at $10.9. A long-term target for the stock could be around $5 in the middle of next year as the prices of raw materials reach a cyclical low.
I recommend buying put option on Alcoa with expiration dates from January up to April. Strike prices for the options could be around $9-$9.5 but because of the volatile conditions out of the money options are also attractive here. Strikes as low as $7-$7.5 for the March-April expiries provide good opportunities for traders to profit from the continuation of the primary down-trend.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
