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Profit Booster
Make Money 3 Ways from Great Growth Stocks

Cabot Profit Booster 151

Last Friday all three of our November covered calls expired for full profits.

Cabot Profit Booster 151

Last Friday all three of our November covered calls expired for full profits. Here were those gains and yields:

OMI $275 per covered call, yield of 13.92%
STM $340 per covered call, yield of 10.75%
PLUG $210 per covered call, yield of 14.09%

One last note before we dive into this week’s idea: Next week is one of Cabot Top Ten Trader’s two weeks off for the year. This means there won’t be a new Cabot Profit Booster idea next week. However, if there is a need to act on an open position, you will hear from me.

Moving on to the market and our positions, I’m happy to report that our five December covered call positions are in in great shape. That doesn’t mean there won’t be some market wiggles at some point, but for now the plan of being in a diverse portfolio, made up of the best-in-class stocks, continues to work.

Which brings me to this week’s idea …

The Stock – Alcoa (AA)

After a rough few years and a horrid start to 2020, the global aluminum market is in full-on recovery mode, led by a rebound in the automotive and construction industries. Rising demand and tightening supplies are boosting the white metal’s outlook, and Alcoa, one of the world’s largest aluminum producers, should benefit.

Its operations include bauxite mining (aluminum ore), alumina refining (for smelting) and aluminum manufacturing. With top user China on the mend, aluminum is expected to be in increasing demand in 2021, driving higher output and pricing; Alcoa reports that China’s net imports of the metal have risen steadily in the last two quarters in what the company calls an “unusual reversal” of normal trade flows (in July and August alone, the firm reported a 75% sequential increase of net aluminum imports to China—a good sign for the global demand outlook).

Management saw additional green shoots in Q3, led by its bauxite segment, where mining hit a record pace. Alcoa’s alumina segment, meanwhile, also broke a record for metric tons produced per day, while the aluminum segment improved as well. While revenue in Q3 was 8% lower from a year ago, it was 10% higher sequentially thanks to gains from better aluminum pricing and increased sales of value-added aluminum products.

Meanwhile, its cash balance increased to more than $1.7 billion, giving the firm some flexibility going forward. Looking ahead, Alcoa sees commercial construction (where more aluminum is used) proceeding at a slower pace due to lower office space demand, but also expects higher demand from residential construction and improving vehicle production in North America and Europe. If the economy continues to rebound, next year’s estimates of a near-breakeven bottom line are likely very conservative.

Technical Analysis

AA-112020-d

AA was in a long-term downtrend for a while and the pandemic really caused the stock to give up the ghost—it took until August just for shares to get back above their 40-week line. Shares then settled down to etch a legitimate launching pad (13 weeks long, 32% deep), and the post-election market rally has enabled a good-looking breakout. Stop - 15.2

The Covered Call Trade

Buy Alcoa (AA) Stock at 20.75, Sell to Open February 21 Strike Calls (exp. 2/19/2021) for $1.75, or a Net Price of 19 or less

Static Return: $175 per covered call (9.21%)

Breakeven:19

Covered Call Return (if assigned): $200 per covered call (10.52%)

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 19 or less. (In this case 20.75 minus 1.75 = 19. Or another example is you could pay 21 for the stock and sell the call for 2, which also equals 19)

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

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