Today is finally election day, and how the market will react in the days to come is truly anyone’s guess. Because of this uncertainty, today’s covered call is a defensive play on a leading aluminum play that “should” do well under either candidate’s presidency.
The Stock – Alcoa (AA)
Aluminum demand is on the rise thanks to an ongoing recovery in packaging, electrical and automotive-related demand. According to a major industry group, global demand for the metal will increase by almost 40% by 2030, which means the sector will need to produce an additional 33 metric tons to meet demand growth in multiple spaces, but particularly for transportation and electronics. Meanwhile, the latest round of fiscal stimulus in China is expected to boost base metals demand next year, which is a big reason for the strength behind Pittsburgh-based Alcoa, America’s top aluminum producer.
At a recent industry conference, management said the firm is seeing considerable growth in India and emerging Asian countries, which amounts to around 10% year-over-year growth overall. The company emphasized that while the growth is across all the industries it serves, including building and construction, packaging-related demand for the North American and European markets is especially strong.
Additionally, Alcoa recently increased its exposure to the lucrative market for alumina and bauxite (key inputs for aluminum production) by acquiring Australia-based Alumina Ltd., which strengthens the firm’s global leadership as a pure-play, upstream aluminum company and increases its economic exposure to alumina through third-party sales from two million to six million metric tons of production.
In Q3, aluminum production increased for the eighth straight quarter for Alcoa, resulting in revenue of $2.9 billion that was up 12% from a year ago. Even better was that earnings of 57 cents more than doubled estimates while adjusted EBITDA of $455 million soared 550% from last year’s Q3 and boomed 40% sequentially. Also helping the cause is that a major Wall Street bank just increased its rating on Alcoa and raised its target price, citing a bullish aluminum price outlook for the next couple of years due to strong global demand and supply constraints. Analysts see earnings ripping higher in 2025, coming in north of $3 per share, and given the way trends go in the commodity world, even that could prove too low.
Technical Analysis
After a dull start to the year, AA sprang to life in early March and rallied 20 points before hitting a peak at 45 at the end of May. Sellers took control from there, pushing the stock under the 40-week line by August (down 40% from its peak), but with the decline coming to an abrupt halt shortly afterward. Shares then etched out a double bottom over the next five weeks, with China’s stimulus announcement causing a turnaround from there. After getting near its old highs, AA has eased back on light trade, making for a good risk/reward situation. Stop – 36
The Covered Call Trade
Buy Alcoa (AA) Stock at 41.5, Sell to Open November 41.5 Strike Calls (exp. 11/15) for $1.50, or a Net Price of 40 or less
Static Return: $150 per covered call (3.75%)
Breakeven: 40
Covered Call Return (if assigned): $150 per covered call (3.75%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 40 or less. (In this case 41.5 minus 1.50 = 40. Or another example is you could pay 41.70 for the stock and sell the call for 1.70, which also equals 40)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| ON Holdings (ONON) | 51.9 | 47 | 43.5 | November 50 -- $4.92 | $2.00 |
| Robinhood (HOOD) | 26.2 | 25 | 22 | November 27 -- $1.90 | $0.35 |
| Delta Airlines (DAL) | 54.4 | 57 | 46.5 | November 55 - $1.75 | $3.00 |
| Credo (CRDO) | 41.3 | 42 | 33.5 | November 40 -- $3 | $3.00 |
The next Cabot Profit Booster issue will be published on November 12, 2024.
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