Alcoa (NYSE: AA - option chain) shares are rising today after the company announced it will reduce production at its Portland smelter in Australia by another 38,000 tons in order to cope with declining metals prices. The company already announced a 15,000-ton production cut at that smelter in December. If you think that the stock 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.AA opened this morning at $8.71. So far today the stock has hit a low of $8.60 and a high of $8.92. As of 11:05, AA is trading at $8.78, up 0.26 (3.0%). The chart for AA looks bearish and S&P gives AA a negative 2 STARS (out of 5) sell ranking.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $5 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. For this particular trade, we will make a 12.6% return in just six months as long as AA is above $5 at October expiration. Alcoa would have to fall by more than 43% before we would start to lose money.
AA has not been below $4.97 in the past year and has shown support around $7.50 recently.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent controls bullish hedged positions in AA.
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