Wednesday, July 8, 2015

AA Earnings

The aluminum and other lightweight metals company Alcoa Inc. (AA), headquartered at Lever House in New York City, publishes earnings on July 8 after the closing bell.
[AA in Wikipedia]



Click on chart to enlarge.
AA at 7:20 a.m. New York time, 90 days 2-hour bars
Implied volatility stands at 43.2%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. AA’s volatility stands in the top percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

I shall use the AUG monthly series of options, which trades for the last time 44 days hence, on Aug. 21.

Strangle, short the $13 calls and long the $9 puts,
sold for a credit and expiring Aug. 22
Probability of expiring out-of-the-money


AA is a low priced stock, below the $20 minimum I normally require. AA kicks off earnings season and highly liquid, so I always give it a look.

I can't put together a trade that will give me sufficient premium to make it worthwhile. My goals are to create a profit zone encompassing the 1 standard deviation range, the chart range and the range defined by the maximum moves immediately after earnings announcements (defined as the difference between the post-announcement open and the pre-announcement close).

The proposed trade described above meets those needs. But the premium produced is only 14 cents, with stock price at $10.70. Since it's a strange, I can't do a formal risk/reward ratio. However, the equivalent iron condor would have a risk/reward ratio of 10:1, with the premium standing at 1/10th of the position's wings.

My strong preference for such position is a ratio of 2:1 or better, with premium at 1/3 the width of the wings.

Decision for My Account

I don't intend to open a position on AA to coincide with earnings.

-- Tim Bovee, Portland, Oregon, July 8, 2015


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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