Alcoa (NYSE: AA) shares are rising this morning after BHP Billiton (NYSE: BHP) disclosed it had made a bid for rival miner Rio Tinto (NYSE: RTP). According to financial analysts, BHP's willingness to pay a premium for Rio and a rise in BHP's stock were bullish signals that demand for commodities was strong. This eased financial worries in the commodities sector, which in turn lifted AA. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AA.The stock hit a one-year high of $48.77 in July after reaching a one-year low of 27.69 last November. AA opened this morning at $39.00. So far today the stock has hit a low of $38.29 and a high of $39.35. As of 10:40, AA is trading at $38.60, up $1.20 (3.2%). The chart for AA looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $32.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make an 8.7% return in just six weeks as long as AA is above $32.50 at December expiration. Alcoa would have to fall by more than 16% before we would start to lose money.
AA hasn't been below $32.50 by more than a few cents since January and has shown support around $38 recently. This trade could be risky if the worldwide economy slows down, but even if that happens, this position could be protected by strong support it has formed around $33 over the past three months, plus AA's 200-day moving average, which is currently at $37 and rising.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AA, BHP, or RIO.
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