Stock Option Advisory

Profits Jump for ALCOA (AA) – Covered Call – Debit Spread

Alcoa Inc. (AA), a New York based aluminum producer, said yesterday its fourth-quarter profits increased 60 percent. The company cited strong aluminum prices and increased demand as chief among the reasons for the positive results.The company’s net income increased to $359 million from $224 million in the same period last year. The results included the savings from the elimination of 6,700 jobs. The jobs were eliminated as part of a restructuring initiative.

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The forth quarter results were a surprise to Wall Street investors. Analysts had expected earnings of 65 cents per share. Actual earnings were 74 cents per share.

The company’s CEO, Alain Belda was quoted in an AP article as saying, “As we enter 2007, market fundamentals remain strong. We will generate more than enough cash this year to fund our capital investment programs. We will continue to deliver strong results, invest in our future, and keep a strong balance sheet.”

Strike in Cleveland Ends:
Over 820 hourly workers at Alcoa’s Cleveland Works approved a contract late last month by a slim margin to end a seven and one-half week strike.

Salaried workers were running the plant while the United Auto Workers Local 1050 began striking in early November.

The negotiations increased wages annually and introduced a matching-funds 401(k) retirement savings plan. The company contributions would match a percentage of employee contributions of up to 6 percent of earnings.

Key issues for workers were easing mandatory overtime requirements and increased health care options for retirees. Wages were not a major issue, a union spokeswoman said. An Alcoa statement says the deal offers employee cost sharing medical and prescription drug plans.

Competitors for AA include: Alcan Inc. (AL), Hydro Aluminium AS (private), Nippon Light Metal Company, Ltd. (private), Accuride Corp. (ACW), Aleris Intl. Inc. (ARS), BHP Billiton Ltd. (BHP), Ball Corp. (BLL), Century Aluminum Co. (CENX), Carbo Ceramics Inc. (CRR), Novelis Inc. (NVL), Quanex Corp. (NX), and Precision Castparts Corp. (PCP).

Company Profile:
Alcoa produces aluminum and alumina worldwide. The company’ s products include foil products, aerospace products, automotive components, fasteners, architectural extrusions, packaging products, precision castings, industrial fasteners, vinyl siding, plastic closures, and PVC film. Common products using Alcoa’s aluminum are aircraft, automobiles, packaging, and consumer products. Alcoa was founded in 1888 as Pittsburgh Reduction Company and changed its name to Aluminum Company of America in 1907. Further, it changed its name to Alcoa, Inc. in 1999. The company is based in New York, New York.

Potential Trades:

Covered Call – ALCOA Inc. (AA) $ 28.52
AABY 07 FEB 27.50 $1.60 5.60% 2.20% 2.20%
AABF 07 FEB 30.00 $0.50 1.80% 1.80% 7.10%
Bull-Call Debit Spread — ALCOA Inc. (AA) $ 28.52
AABY 07 FEB $27.50 $1.60 AABX 07 FEB $22.50 $6.20 8.70% $27.10
AABY 07 FEB $27.50 $1.60 AABE 07 FEB $25.00 $3.80 13.60% $27.20

The first covered call trade, an in the money covered call, offers decent 5.6% downside protection and a potential profit of 2.2% (39 days) if the stock remains unchanged or rises. The second covered call trade, an out of the money covered call, offers a less conservative 1.8% downside protection and a potential profit of 1.8% if the stock remains unchanged. However, if the stock rises above the AABF call option‘s $30 strike price, the potential profit becomes 7.1%.

The first bull call debit spread offers 8.7% potential profit if the stock remains above $27.50. If the stock decreases below the break-even price of $27.10, the investment begins to lose money. If the stock price goes below the lower strike price of $22.50, the entire investment is lost. The net cost of this trade, per 100 options, is $460.00.

The second bull call debit spread offers 13.6% potential profit if the stock remains above $27.50. If the stock decreases below the break-even price of $27.20, the investment begins to lose money. If the stock price goes below the lower strike price of $25.00, the entire investment is lost. The net cost of this trade, per 100 options, is $220.00. This spread is less conservative than the first bull call debit spread but is an interesting alternative because there is little difference in their break-even prices.

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[tags]New York, Wall Street, Alain Belda, AP, Cleveland Works, United Auto Workers, Hydro Aluminium AS, Nippon Light Metal Company, Ltd., Pittsburgh Reduction Company, AA, ALCOA Inc., ACW, Accuride Corp., AL, Alcan Inc., BHP, BHP Billiton Ltd., BLL, Ball Corp., CENX, Century Aluminum Co., CRR, Carbo Ceramics Inc., NVL, Novelis Inc., NX, Quanex Corp., PCP, Precision Castparts Corp., bull call debit spreads, covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options[/tags]

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