Tuesday, April 7, 2009

AA Short Straddle

Alcoa (AA) is reporting earnings after the bell and the stock is around 7.50 or so. I don't really have a directional bias on AA but would think it has seen its bottom. The stock has rallied lately with the market and volatility is high on this name but I think the options are a bit too juiced for the potential move in store for the stock. The options are implying about a 17% move after earnings.

The trade is to sell the at the money April 7.5 straddle.

In this trade you are selling both the at the money call and put.

You can sell this right now for about 1.30 and that is the max gain if AA closes April exp. at 7.50.

This is an unlimited risk trade but I do not plan on holding past the earnings announcement.

The goal is to take out some of the premium from the trade when implied volatility collapses.

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