Thursday, July 18th, 2019

Buy Calls on Alcoa


Although lower second quarter earnings drove Alcoa’s stock price lower news of a new contract with Airbus may be good reason to by calls on Alcoa. Aluminum prices are at historic lows which is what drove down aluminum profits for the company in the second quarter of this year. However, its presence in aerospace is substantial and growing. A recent press release tells us that Alcoa (AA) has just finalized agreements worth $1.4 Billion with the European airplane maker, Airbus, to supply a wide range of products for virtually all of Airbus’ products. That includes the newest, the A350. Highlights of this contract are the aluminum and aluminum-lithium parts for wings and fuselage panels. These parts are meant to compete with the carbon fiber reinforced plastic parts used by Boeing in its 787 Dreamliner. The company has developed state of the art processes to make aluminum-lithium parts giving it a technical edge over many other aluminum makers and giving traders a reason to buy calls on Alcoa before the rest of the market catches on. Overall Alcoa gets three and a half billion in revenue yearly from its aerospace customers with products including aluminum, lithium, titanium, and nickel. Although many are tempted to buy puts on airline stocks there are lots of planes in the pipeline and lots of profits for efficient suppliers, which may be a good reason to buy calls on Alcoa.

Where Will Alcoa’s Profits Be?

In an increasingly competitive world the most successful companies are commonly the most innovative. When Alcoa found out that Boeing intended to use carbon fiber reinforced plastics on its Dreamliner the company looked for an alternative that it could make. It had to be competitive in being stronger, lighter, corrosion resistant, and cheaper. The technology they developed was aluminum-lithium. According to Alcoa, using aluminum-lithium instead of composites will improve fuel efficiency by a forth, reduce weight by as much as a tenth, and result in a product that requires roughly half as many inspections over time for structural problems and corrosion issues. As with the use of composites aluminum-lithium results in an airplane with better humidity control and larger windows. In the world today there are over eight thousand commercial aircraft on order. This amounts to eight years of aircraft production. These would also appear to be good reasons to buy calls on Alcoa. Today’s leading aircraft makers are Boeing and Airbus. However, Embraer in Brazil, Comac in China, and Russian manufacturers all are on the rise. Given time these companies will cut out niches in the global market and use advanced technologies such as Alcoa’s aluminum-lithium parts to make lighter, stronger, more cost efficient aircraft. Succeeding in options trading often has to do with seeing the future and then timing the purchase or sale of an options contract.

Using Options to Get a Good Price

Despite what could be a rosy future for Alcoa in making parts for the automotive and aerospace industries the stock is down today due to low aluminum prices. Options traders can buy calls on Alcoa simply to make a short term profit. However, long term investors can also buy calls on Alcoa in order to buy the stock at a depressed price prior to a global economic recovery and more profits for Alcoa. Risk management in option trading allows investors to stake out positions very cost effectively and not buy until the stock goes up.

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