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Earnings Preview: Alcoa Inc. Kicks Off a Fresh Round of Reports

The aluminum giant is on deck and could set the tone for the rest of Wall Street

by 7/9/2010 3:00:00 PM
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Trading the Event

The question for those looking to trade Alcoa surrounding the event is, do you bet on the current rebound and the company's history of positive earnings reports? Or do you follow the bearish crowd and the stock's intermediate-term price action? Luckily for options traders, you can bet on both a potential breakout and unwinding of pessimism following a better-than-expected report, and a sharp decline in the wake of a breach of support at the $10 level following a poor quarterly showing.

How? By entering a July 10 straddle. At last check, you could establish such a position for $1.01, or $101 per contract. Doing so means that you would need AA shares to either rally roughly 1.8% to $11.01 or fall 16.8% to $8.99 in order to reach breakeven. Of course, you should consider your own risk tolerance levels and criteria before entering such a trade.



July 10 straddle profit/loss scenario

Broader Implications?

As my colleague Alan "Rocky" White has previously noted in Schaeffer's Monday Morning Outlook, Alcoa's earnings report can have broader implications for the market as a whole. Specifically, the S&P 500 Index (SPX) tends to follow Alcoa's post-earnings reaction - i.e., if AA rallies post earnings, it sets a precedent for the SPX's direction. According to the latest data from Rocky, the SPX is up 67% of the time in the three months following a positive earnings reaction by AA shares, with an average gain of 2.84%.

But, when AA reacts negatively to the release, the SPX loses 1.31%, on average, during the next three months, and is positive less than half the time. In fact, the broad-market index is currently down more than 9% following the last Alcoa earnings report, when AA dropped 1.58% in the session following its last quarterly release.



SPX performance following an Alcoa earnings reaction

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