Options Action

Options Traders Bet On Alcoa Earnings Beat. See Stock Hitting $10 by November

Brian Stutland|President, Stutland Equities and CNBC Contributor

Note: This post was written by Brian Stutland, President of Stutland Equities and a contributor to CNBC's "Options Action."

Let the earnings begin!

A worker walks among rolls of semi-finished aluminum at the Alcoa aluminum factory in Szekesefehervar, Hungary.
Getty Images

Today after the closing bell, Alcoa will report their third quarter results to unofficially kick off another earnings season. Analysts are looking for earnings of $0.01 on revenue of $5.57B, and at least one options trader seems to believe that Alcoa will beat these expectations. (Track All Your Earnings News Here)

Yesterday, with Alcoa stock trading at $9.12, we saw one trader buy 10,078 Nov. 10-strike calls for $0.12 and sell 5,978 April 8-strike puts for $0.41. This is a bullish trade in which the trader gains long exposure to the stock by buying near-term call options, and finances it by selling long-dated out-of-the-money puts. This trader likely avoided buying October calls because they are they are much more expensive than November options, which don’t capture earnings.

So what’s the bottom line here?

This trader expects Alcoa to be above $9.91 at November expiration, which is 8.7% above yesterday's close. Historically, Alcoa has moved 3.2% after reporting earnings, and currently the options market is pricing in a move of 4.9%.

One reason this trader may be bullish on Alcoa is because everyone else has become so bearish. Since reporting mixed results in Q2, Alcoa has been downgraded by three analysts, aluminum prices have fallen, and the company announced it will take an $85M after-tax charge as a result of the EPA's Proposed Remedial Action Plan for the Grasse River. However, CEO Klaus Kleinfeld has continued to say that the fundamentals of the aluminum market are strong, and that he expects global demand to increase 7% this year. With sentiment generally pessimistic on Alcoa, the stock could have quite a bit of room to run should they beat their earnings expectation, which is exactly the event that this options trader hopes to profit from.

Programming Note: Kleinfeld will be on the CNBC's "Closing Bell" with Maria Bartiromo at 4pm today. I for one will be watching.

Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."

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