Alcoa (AA) falls on economic worries

Alcoa, Inc. (NYSE: AA) stock is falling this morning on news that the Consumer Price Index rose 0.8% last month, the biggest one-month increase in two years. Rising gas prices led to the jump, which was worse than the 0.6 percent rise expected by economists. The jump in inflation is another bad sign for an economy already weighed down by the credit crunch, which is in turn a bad sign for heavy industrial companies like Alcoa. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on AA.

After hitting a one-year low of $28.09 in January, the stock hit a one-year high of $48.77 in July. This morning, AA opened at $35.83. So far today the stock has hit a low of $35.11 and a high of $36.63. As of 10:40, AA is trading at $35.20, down $1.13 (-3.1%). The chart for AA looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 5 weeks as long as AA is below $40 at January expiration. Alcoa would have to rise by more than 13% before we would start to lose money.

AA has not been above $40 by more than a few cents since July, and shown resistance around $37 recently. This trade could be risky if economic indicators turn to the positive, but even if that happens, this position could be protected by the fact that the stock topped around $40 in early November, combined with any resistance it might find at its $200 day moving average, which is currently around $37.50.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AA.