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We Break All Olympic and World Records: PROFITS OF 973% AND 1627%. …and ALCOA – Foiled Again! (AA, PG, RSG)

Posted on February 17, 2022

We’re offering a super-sized takeaway on today’s artisanal, risk-defined options trade: no less than 3233%.

But before we get to it, we have two to close for some spine-crack profits.

Let’s Do It!

First up is our PG initiative, launched January 3rd in Hair is Bad! Smells are Bad! Synthetic Tonics Good!  There, you’ll recall we urged you to sell the PG March 18th 160/165 CALL spread for $2.55 and buy the PG March 18th 165/160 PUT spread for $2.50.  Total credit was a nickel.

And now…?

The CALL spread can be repurchased for $1.69 (2.41/0.72) and the PUT spread sold for $3.25 (7.55/4.30).  Execute, and you scamper like the Prince of Sumatra with $1.61 on NOTHING laid out.

Adjusted for minimal commissions gives you a wild 973% in just six weeks!

What a party!

Josh M. was happy with this one, though he won’t let on just how big his take was.

And now to our RSG trade of last week.

The directive was called The Garbage Man Cometh, and it recommended you sell the RSG March 18th 125/130 CALL spread for $1.85 and buy the RSG March 18th 125/120 PUT spread for $1.80.  Total credit on the affair was a nickel.

Today, the CALL spread can be closed for a debit of $0.36 (0.36/0.00), while the PUT spread will fetch you a handy $2.90 (6.30/3.40).

Get it done and – again – you break the bank to the tune of $2.59 on ZILCH expended.

Adjusting for minimal commissions gives you a fat Rockefeller (yimach shemo v’zichro) 1627%.

I – N     J – U – S – T     O – N – E     W – E – E – K

We move now to this week’s bet.

It’s all about the Aluminum Company of America today – Alcoa (NYSE:AA) – whose stock tacked on better than 75% in the last 12 weeks, and whose plans to rise further we’re now attempting to foil.

Inflation, yes – we know about it.

AA has jumped with the rest of the commodity class in line with price rises on… well, nearly everything.

Inflation is an issue, and aluminum prices are not immune (ahh, that word again!) to the general trend in commodities.

Supply disruptions in China, in particular, have added some 25% to the cost of the metal in just the last 60 days, while threats of war on the Russian steppe have also contributed to supply worries.

Insiders also dumped nearly $20 million in stock over that time period.

Hmm…

Now some fundamentals –

  • Aluminum makers are not supposed to trade with a P/E of 35.30 (forward P/E, by the way, is just 11.10, according to analysts’ consensus estimates – much closer to AA’s long term annual average; meaning: we’re going to revert, and hard!),
  • Dividend Yield is a tinny 0.51%,
  • Price to Book is unreasonably high at 3.75, and
  • Analysts see an Earnings contraction in the year ahead of 4.97%!

In essence, we have a single blow-out quarter result from a month ago that had nothing whatsoever to do with the company itself.

It’s our firm conviction that the rise has now come to an end, and we’re playing it with a cheap entrée (just $0.15) that could bag us a 3233% win.

Now to the charts –

We’ve brought you two years’ worth of the daily chart here to show just how wild AA’s rise has been.

  1. We start with a ridiculously exaggerated 1460% price gain since March of 2020 (in red).  That, in the face of a decline in sales over the last five years of 4.97% on average!
  2. The rise has now touched the top of an eight month trend channel (in blue).  At this point, we would expect a slide toward the lower end of the range – at the very least.  That would bring price to between 60 and 65 depending upon the time frame required to get there.
  3. At nearly $78, AA is cruising 120% higher than its long-term moving average (in black), a level which normally produces a snap-back of meaningful proportions.
  4. Daily RSI is nearly overbought (in green).  Monthly RSI is at its highest level in company history (not shown here)!
  5. MACD is at its highest level in 23 years.  That means the latest rise is the company’s steepest since 1999.  Weekly and monthly MACD readings are also at their highest in company history (not shown here).
  6. The stock’s gain in February represents its biggest monthly gain ever – and we still have ten days to go!

When a company like Alcoa becomes a 15 bagger over the course of two years, you know you’ve entered a state of severe oxygen deprivation.

And that’s why we’re acting thus –

A Jew and His Gold recommends that you consider selling the AA April 14th 75/80 CALL spread* for a credit of $1.80 (6.40/4.60) and buying the AA April 14th 70/65 PUT spread** for $1.95 (5.10/3.15).  Total debit on the trade is $0.15.

[*Sell the 75 CALL and buy the 80 CALL.  **Buy the 70 PUT and sell the 65 PUT.]

Rationale: the trade offers us a chance to pull in $4.85 on just $0.15 spent, for a max haul of 3233%, and we only require a pullback to the short term moving average (above, tan) to accomplish that.

Max loss is $5.15 (difference between the CALL strikes plus the initial debit).

Because spreads tend to be excellent on the options we’re going to look to close as soon as price approaches the aforementioned short-term MA.

And may G-d grant us victory over our enemies within and without.

Many happy returns!

Matt McAbby

 

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