Alcoa, Inc. (NYSE: AA) stock is falling after a FBR analyst downgraded the stock to “Market Perform” from “Outperform.” The analyst added in a note to investors that he is concerned that fundamentals will slide in the moment quarter whether aluminum supply is able to meet demand. whether you think that stock won’t be rising too far in the coming months, soon after it could be a good duration to look at a bearish hedged play on AA.

After hitting a one-year high of $48.77 in July, the stock hit a one-year low of $26.69 in January. that AM, AA opened at $37.01. So far nowadays the stock has hit a low of $36.39 and a high of $37.90. As of 12:50, AA is trading at $36.70, down $1.67 (-4.3%). The chart for AA looks bullish and regular, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on that stock, I would consider an April bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of shout options to

hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For that specific trade, we will form a 4.2% return in one and a half months as enlarged as AA is below $45 at April expiration. Alcoa would have to rise by more than 23% before we would start to lose money. memorize more about that type of trade here.

AA hasn’t been above $45 since July and has shown resistance around $40 recently. that trade could be risky whether the US economy bottoms and picks up, but even whether that happens, that position could be protected by resistance AA might find around $40, where the stock found resistance back in November.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of enlarged and short stock and option positions that may include holdings in companies he writes about. At publication instance, Brent neither owns nor controls positions in AA.

Original post by Brent Archer

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