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Options Action: Alcoa Earnings Strategy

Wednesday, 6 Oct 2010 | 6:02 PM ET

With Alcoa kicking off third-quarter earnings season after the closing bell Thursday, Mike Khouw of Cantor Fitzgerald shared an options play on the aluminum maker.

Alcoa's stock is up more than 20 percent since late August and it seems the market has positive expectations for its earnings report, Khouw said. Those who own the stock, however, want to protect profits. Khouw suggests putting on an Oct. 12-13 collar, where he would buy the Oct. 12 put and sell the Oct. 13 call.

**MIKE's AA TRADE**
Buy Oct. 12 put at 13 cents
Sell Oct. 13 call at 13 cents

Because you pay 13 cents to buy and 13 cents to sell, you're not paying anything. That's called a "zero-cost collar," Khouw explained. This is a structure that's going to protect you if the stock drops below 12 bucks.

Watch the video to learn more about this trade.

Options Action
An earnings season preview, with Mike Khouw, Cantor Fitzgerald.

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Trader disclosure: On Oct. 6, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Colin McGranahan is long (KSS), (AMZN), (ROST), (SWY) and (GPS). Guy Adami owns (AGU), (INTC), (BTU), (NUE), (C), (GS) and (MSFT). Tim Seymour is long (AA), (AAPL), (BBY) and (MON).GE Is The Parent Company Of CNBC
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